Cost Base Explained: What You Can And Cannot Add to Reduce Capital Gains Tax

Updated for the 2024–25 financial year

Your cost base is the total of what it cost you to acquire, own, and dispose of an asset, and every dollar you legitimately add to it directly reduces your capital gain and the tax you owe. On a $300,000 gain, applying the 50% CGT discount after a correctly calculated cost base could save an individual taxpayer tens of thousands of dollars. This guide explains every element of cost base under Australian tax law, what you can and cannot include, how to calculate your final CGT liability, and the record-keeping the ATO expects you to maintain.

Table of Contents

1. What Is Cost Base and Why It Matters
2. The Five Elements Explained: What You CAN Add
3. What You CANNOT Add to Cost Base
4. Capital Works Deductions: The Add-Back Rule
5. Cost Base Adjustments for Special Situations
6. Pre-CGT Assets: The 20 September 1985 Exemption
7. Step-by-Step: Calculating Your Capital Gains Tax
8. Worked Examples: Real Dollar Amounts for Common Scenarios
9. The 50% CGT Discount: How It Reduces Your Tax
10. Cost Base for Non-Property Assets
11. Reporting Cost Base and Adjustments on Your Tax Return
12. Record-Keeping Requirements: What to Keep for 5+ Years
13. Common Mistakes and How to Avoid Them
14. The 6-Year Rule and CGT Compliance
15. Key Takeaways and Next Steps

What Is Cost Base and Why It Matters

The cost base of an asset is the total amount it has cost you to acquire, own, and dispose of that asset. When you sell a capital asset, the ATO calculates your capital gain by subtracting the cost base from the capital proceeds (essentially, the sale price). The higher your cost base, the lower your capital gain, and the less tax you pay.

In Australia, the correct term is cost base, not “cost basis” as used in some other countries. The rules are set out in Division 110 of the Income Tax Assessment Act 1997 (ITAA 1997). Every legitimate cost you add to your cost base is a dollar that reduces your taxable gain, so understanding exactly what qualifies is one of the most practical ways to manage your CGT liability.

The Five Elements of Cost Base

The ATO recognises five separate elements that make up the cost base of an asset. Each has its own rules about what qualifies and what does not.

The Five Elements Explained: What You CAN Add

Element 1: Acquisition Costs (Purchase Price and Associated Fees)

The first and usually largest element is the purchase price itself. On top of this, you can include all costs that were directly associated with acquiring the asset. For a property purchase, these typically include:

• The purchase price stated in the contract
• Stamp duty (land transfer duty) paid on the purchase
• Legal fees paid to a solicitor or conveyancer
• Survey costs related to the purchase
• Valuation costs paid at the time of acquisition
• Search fees and conveyancing disbursements

For example, if you purchased an investment property for $550,000, paid $22,000 in stamp duty, and $2,500 in legal fees, your Element 1 cost base is $574,500.

Element 2: Incidental Costs (Buying and Selling Expenses)

Incidental costs are the professional and transactional costs you incur both when you buy and when you sell an asset. Under section 110-35 of the ITAA 1997, these can include amounts paid to:

• A surveyor or valuer engaged in connection with the acquisition or disposal
• An auctioneer conducting the sale
• An accountant or tax adviser for CGT-related advice specific to the transaction
• A broker or financial adviser in connection with acquiring or disposing of shares or other assets
• A real estate agent (selling commission)
• A consultant or legal adviser
• Advertising costs to find a buyer or seller
• Transfer costs, including electronic lodgement fees
• Borrowing costs (such as loan establishment fees) that are not otherwise deductible
• Mortgage discharge fees or termination fees paid on disposal

Incidental costs at the time of sale are particularly valuable because they reduce your capital gain dollar for dollar, in addition to any costs incurred when purchasing.

Element 3: Ownership Costs (But Not for Income-Producing Assets)

Ownership costs cover amounts you spent simply holding the asset, such as interest on a loan, council rates, land tax, insurance premiums, and general maintenance costs. However, there is a critical restriction: you can only include ownership costs in your cost base if the asset was not used to produce assessable income during the period those costs were incurred.

This means ownership costs are generally only relevant for owner-occupied properties or assets used purely for personal purposes. If you rented out your investment property, the ownership costs (interest, rates, insurance) would instead have been tax deductible each year as they were incurred, and cannot also be added to the cost base.

There is also a date restriction: ownership costs for assets acquired before 21 August 1991 cannot be included in the cost base under Element 3. This restriction is set out in section 110-45 of the ITAA 1997.

Element 4: Capital Improvement Costs (Adding Value, Not Repairs)

A capital improvement is expenditure that increases the value of an asset, extends its useful life, or brings it into existence in a new form. These amounts are added to the cost base as they are incurred. Common examples for residential property include:

• Building a new room, extension, or granny flat
• Installing a new kitchen or bathroom where none existed
• Constructing a garage, carport, or garden shed
• Upgrading the electrical wiring or plumbing to a higher standard
• Adding a swimming pool or deck
• Landscaping that is of a capital nature

The key distinction is between capital improvements and repairs or maintenance. Repairs restore an asset to its original condition and are immediately deductible if the asset produces income. Improvements create something new or significantly better. Only capital improvements go into the cost base.

Note that expenditure on goodwill cannot be added to the cost base of a physical asset, even if it was incurred as part of acquiring a business alongside that asset.

Element 5: Title Costs (Defending or Preserving Ownership)

The fifth element covers costs you incur to establish, preserve, or defend your title to an asset, or your right to use it. Examples include:

• Legal costs of a boundary dispute with a neighbour
• Legal costs of opposing a compulsory acquisition that would extinguish your title
• Costs of resolving an adverse claim over your land

These are relatively uncommon but can be significant amounts. If the legal costs are directly related to preserving your ownership of the asset, they belong in Element 5.

What You CANNOT Add to Cost Base

Getting cost base wrong in the wrong direction is just as damaging as missing legitimate inclusions. Including costs that do not qualify can expose you to penalties and interest if the ATO audits your return. The following costs are explicitly excluded:

The most important prohibition is the rule against double-dipping: if you have already claimed a cost as a tax deduction in any income year, you cannot also include it in your cost base. The two treatments are mutually exclusive.

Capital Works Deductions: The Add-Back Rule

This is the rule that catches the most Australian property investors by surprise. If you own a rental property and have claimed capital works deductions under Division 43 of the ITAA 1997 (the 2.5% building write-off for structural improvements), those amounts must be subtracted from your cost base when you sell.

The rule applies to assets acquired after 13 May 1997. The logic is straightforward: you have already received a tax benefit for those amounts each year as deductions. If they also stayed in the cost base, you would receive a double benefit by reducing your capital gain as well.

Worked Example: Capital Works Add-Back

You purchased a rental property in 2010 for $450,000. You also spent $60,000 on a structural renovation in 2012, which you claimed as capital works deductions at 2.5% per year for 10 years before selling in 2022. Total capital works deductions claimed: $15,000 (2.5% x $60,000 x 10 years).

Your cost base calculation:
Purchase price: $450,000
Renovation cost: $60,000
Less capital works deductions claimed: ($15,000)
Stamp duty and legal fees (purchase): $18,000
Agent commission (sale): $14,000
Total cost base: $527,000

If you sold for $750,000, your capital gain would be $750,000 − $527,000 = $223,000.

Note: even if you were entitled to claim capital works deductions but chose not to, the ATO still requires you to reduce your cost base by the amount you could have claimed. Failing to claim does not protect you from the add-back rule.

Cost Base Adjustments for Special Situations

Inherited Properties and Step-Up in Value

When you inherit an asset, your cost base depends on when the deceased originally acquired it and whether it was their main residence.

For assets the deceased acquired after 20 September 1985 (the date CGT commenced), your cost base is generally the deceased’s cost base at the date of death, updated by any expenditure incurred by the estate.

For assets the deceased acquired before 20 September 1985 (pre-CGT assets), your cost base is the market value of the asset at the date of death. This is sometimes called a “step-up” because the base resets to the current market value, meaning any gain that accrued during the deceased’s ownership effectively disappears for CGT purposes.

You should obtain a formal valuation from a qualified valuer at the date of death, as this will form the foundation of your cost base and will need to be substantiated if the ATO queries it.

Partial Sales and Property Subdivisions

When you subdivide land or sell part of a property, you must apportion the original cost base between the portion sold and the portion retained. There is no single prescribed method, but the ATO generally accepts apportionment by area or by relative market value, provided the method is reasonable and applied consistently.

Example: Subdivision

You purchased a 2,000 sqm block for $400,000 (including all acquisition costs). You subdivide it into two equal lots of 1,000 sqm each and sell one lot for $280,000.

Apportioned cost base for the sold lot: $400,000 x (1,000 / 2,000) = $200,000
Capital gain on sale: $280,000 − $200,000 = $80,000

Your retained lot retains a cost base of $200,000. Any costs specifically incurred on subdivision (legal fees, survey costs, council fees) should be added to the cost base of the lots to which they relate.

AMIT Cost Base Adjustments (Attribution Managed Investment Trust)

If you hold units in an Attribution Managed Investment Trust (AMIT), your cost base is adjusted each year based on the trust’s tax outcomes. When the AMIT allocates income to you that exceeds the cash distributions you received (called a “cost base net amount shortfall”), the ATO requires you to reduce your cost base by the shortfall amount. Conversely, if cash distributions exceed the taxable income allocated, your cost base increases. These adjustments are notified to you each year on your AMIT member annual statement (AMMA statement), and it is important to track them carefully so your cost base is accurate when you eventually sell your units.

Depreciating Assets and the Reduced Cost Base

Individual items within a property, such as carpet, air conditioners, dishwashers, and other plant and equipment, are depreciating assets and are treated separately from the property itself under Division 40 of the ITAA 1997. When you sell these items as part of a property sale, any gain or loss is generally dealt with through the depreciation balancing adjustment rules rather than the CGT cost base rules.

Where CGT does apply (for example, for certain assets in the hands of individuals), the reduced cost base is used to calculate a capital loss. The reduced cost base is similar to the cost base but excludes Element 3 (ownership costs) and makes adjustments for any deductions already claimed. If the capital proceeds exceed your cost base, you have a capital gain. If they are less than your reduced cost base, you have a capital loss.

Pre-CGT Assets: The 20 September 1985 Exemption

Any asset acquired before 20 September 1985 is a pre-CGT asset and is generally exempt from capital gains tax entirely. If you sell a pre-CGT property, the entire proceeds are free from CGT.

However, if you make significant capital improvements to a pre-CGT asset, those improvements may be treated as a separate CGT asset if their cost exceeds 5% of the total capital proceeds from the sale. In that case, CGT applies only to the improvement component, calculated separately. The 5% threshold and the methodology for treating improvements to pre-CGT assets are addressed in the ATO’s guidance on cost base calculations.

When you report a pre-CGT asset sale on your tax return, you simply note that the asset is pre-CGT and no CGT event amount is included. If improvements trigger a separate CGT calculation, that amount is reported in the capital gains section of your individual tax return.

Step-by-Step: Calculating Your Capital Gains Tax

Step 1: Determine Capital Proceeds (What You Received)

Capital proceeds are what you receive in exchange for the asset. For a straightforward sale, this is the sale price in the contract. However, several adjustments apply:

• Gifts and related-party transfers: if you give an asset away or sell it to a family member below market value, the ATO substitutes the market value at the date of the transaction as your capital proceeds. You cannot use an artificially low price to reduce a capital gain.
• Non-cash consideration: if you receive property or services rather than cash, the market value of what you receive is your capital proceeds.
• Market value: market value should be established by a qualified and independent valuer where possible, particularly for non-arm’s length transactions.

Step 2: Calculate Your Cost Base (What We’ve Covered)

Add together all five elements of the cost base as described in the sections above, making sure to subtract any capital works deductions that have been claimed or that you were entitled to claim.

Step 3: Calculate Capital Gain or Loss

The formula is:

Capital Gain = Capital Proceeds − Cost Base

If the result is positive, you have a capital gain, which is included in your assessable income for the year. If the result is negative, you have a capital loss, which can be used to offset capital gains in the same year or carried forward to future years. Capital losses cannot be offset against ordinary income.

Worked Examples: Real Dollar Amounts for Common Scenarios

Example 1: Investment Property with $200,000 Gain

Sarah purchased an investment property in 2015 for $480,000. She paid $19,200 in stamp duty and $2,300 in legal fees on purchase. In 2018, she renovated the kitchen and bathrooms for $35,000 (capital improvement, not claimed as a deduction). She sold the property in 2024 for $720,000, paying $18,000 in agent commission and $1,500 in conveyancing fees on sale.

• Purchase price: $480,000
• Stamp duty: $19,200
• Legal fees (purchase): $2,300
• Capital improvement (renovation): $35,000
• Agent commission (sale): $18,000
• Conveyancing (sale): $1,500
• Total cost base: $556,000

Capital gain: $720,000 − $556,000 = $164,000

Because Sarah has held the property for more than 12 months, she is entitled to the 50% CGT discount. Discounted capital gain: $82,000. This $82,000 is added to her other income for the year and taxed at her marginal rate.

Example 2: Investment Property with $300,000 Gain

James purchased an investment property in 2012 for $390,000. He paid $14,500 in stamp duty and $2,000 in legal fees on purchase. He spent $45,000 adding a granny flat in 2016 (capital improvement). He sold in 2024 for $780,000 with $19,500 in agent commission and $1,800 in legal fees on sale.

• Purchase price: $390,000
• Stamp duty: $14,500
• Legal fees (purchase): $2,000
• Granny flat construction: $45,000
• Agent commission (sale): $19,500
• Legal fees (sale): $1,800
• Total cost base: $472,800

Capital gain: $780,000 − $472,800 = $307,200

With the 50% CGT discount applied: $153,600 is included in James’s assessable income. If James’s marginal tax rate is 37%, the CGT payable is approximately $56,832. Without the discount, it would have been approximately $113,664, a saving of over $56,000.

Example 3: Residential Property with Capital Works Deduction Add-Back

Michelle purchased a rental property in 2009 for $420,000. She paid $16,000 in stamp duty and $2,500 in legal fees. In 2013, she spent $50,000 on structural improvements (Division 43 capital works). She claimed 2.5% per year for 11 years before selling in 2024, totalling $13,750 in capital works deductions. She sold for $710,000 with $17,750 in agent commission.

• Purchase price: $420,000
• Stamp duty: $16,000
• Legal fees (purchase): $2,500
• Capital works expenditure: $50,000
• Less capital works deductions claimed: ($13,750)
• Agent commission (sale): $17,750
• Total cost base: $492,500

Capital gain: $710,000 − $492,500 = $217,500

After the 50% CGT discount: $108,750 included in assessable income. At a 37% marginal rate, CGT payable is approximately $40,238.

Had Michelle incorrectly left the full $50,000 in the cost base without the add-back, she would have calculated a gain of $203,750 before discount, understating her gain by $13,750 and potentially facing ATO amendments with interest and penalties.

The 50% CGT Discount: How It Reduces Your Tax

Who Gets the 50% Discount and When

The 50% CGT discount is available to Australian resident individuals and complying superannuation funds (which receive a one-third discount rather than 50%). Companies and most trusts do not qualify for the discount. The discount is provided under Division 115 of the ITAA 1997.

To qualify, you must have held the asset for at least 12 months before the CGT event (usually the date of contract for sale, not settlement). The 12 months is calculated from the day after acquisition to the day of disposal.

The discount is applied after the cost base has been fully calculated and after any capital losses have been applied to reduce the gain. You do not apply the discount to the cost base itself; it reduces the net capital gain that is included in your assessable income.

Calculating Tax With and Without the Discount

Tax amounts in the table above are illustrative and assume a flat 37% marginal rate applied to the full discounted gain. Your actual tax will depend on your total taxable income for the year, as the gain is added on top of your other income and may push you into a higher bracket.

Cost Base for Non-Property Assets

Shares and Listed Securities

The same five-element cost base framework applies to shares, but the practical composition is different. For Australian shares, the cost base typically includes:

• The purchase price of the shares
• Brokerage fees paid on purchase
• Brokerage fees paid on sale (as an incidental cost)

Example: You buy 1,000 shares at $5.00 each ($5,000) and pay $19.95 brokerage. You later sell for $7.50 each ($7,500) and pay $19.95 brokerage on sale. Cost base: $5,019.95. Capital proceeds: $7,480.05 (net of selling brokerage). Capital gain: $2,460.10.

Corporate actions such as bonus share issues, rights issues, share splits, and demergers can all affect cost base. The ATO provides specific guidance on these events, and many share registries provide cost base information through their investor portals. It is important to track corporate action adjustments in the year they occur rather than attempting to reconstruct them at sale.

Artwork, Collectables, and Personal Items

Artwork, jewellery, antiques, coins, stamps, and similar collectables are subject to CGT but with additional restrictions. Capital losses from collectables can only be used to offset capital gains from other collectables, not from general assets. Additionally, items that cost less than $500 are exempt from CGT entirely.

Element 3 (ownership costs) is not available for collectables. You cannot add insurance or storage costs for artwork or jewellery to the cost base, as these are considered personal expenditure even if the asset is ultimately subject to CGT on sale.

Business Assets and Plant and Equipment

For business owners, depreciating assets (plant and equipment, vehicles, machinery) are generally dealt with under the Division 40 balancing adjustment rules rather than the CGT cost base rules. When a depreciating asset is sold, you compare the termination value (sale proceeds) to the adjustable value (written-down value after depreciation). If termination value exceeds adjustable value, the excess is included in your assessable income as a balancing charge. If less, you can deduct the shortfall.

Where a business asset is also a CGT asset (for example, land or a building), the cost base applies in the usual way, with the reduced cost base adjusted for any depreciation claimed.

Reporting Cost Base and Adjustments on Your Tax Return

Where and How to Report on Your Individual Tax Return

Capital gains are reported at Item 18 of the individual income tax return (the Capital Gains section). You will need to complete:

• Label H: Net capital gain (included in assessable income after discount and losses)
• Label V: Total current year capital gains (before discount)

If your capital gains are from more than one source, or you have capital losses to apply, you will need to complete the CGT record-keeping tool or a separate CGT schedule. The ATO’s myTax platform guides you through these questions if you lodge online. If you use a tax agent, they will complete the CGT schedule as part of your return preparation.

Documentation and Substantiation

The ATO can request substantiation of any CGT claim at any time within the review period (generally two years for individuals with simple tax affairs, four years in other cases). For cost base claims, you need to be able to demonstrate each element with source documents. Verbal recollections or estimates will not be sufficient.

Every line item in your cost base should be supported by a corresponding document. If you cannot produce a receipt or contract for a claimed cost, the ATO is entitled to disallow it.

Record-Keeping Requirements: What to Keep for 5+ Years

Essential Documents to Retain

The following documents should be retained from the moment you acquire an asset:

• The purchase contract (signed and dated)
• Stamp duty assessment notice
• Legal invoices and receipts from purchase and sale
• Invoices and receipts for all capital improvements (builder, architect, council)
• Bank statements confirming payment of all costs
• Valuations obtained at acquisition, at date of death (for inherited assets), or at change-of-use date
• Capital works deduction records (Division 43 quantity surveyor reports and annual deduction amounts)
• Real estate agent statements from the sale
• Copies of all tax returns in which deductions related to the asset were claimed
• Subdivision plans and council approval documents
• AMIT annual member statements (for trust investments)
• Mortgage and loan documentation related to the asset

How Long to Keep Records

Under section 121-25 of the ITAA 1997, you are required to keep CGT records for five years after the CGT event (usually the date of sale). However, if you have a capital loss that is carried forward to a future year, you must keep the records relating to that loss until five years after the year in which the loss is finally applied. Because some property ownership periods span many decades, the practical advice is to retain all purchase and improvement records for the entire period of ownership plus five years after sale.

Digital copies of documents are generally acceptable, provided they are legible and can be produced on request.

Common Mistakes and How to Avoid Them

Forgetting to Add Back Capital Works Deductions

This is the most common and costly error. Many investors correctly include the cost of structural improvements in their cost base, but fail to subtract the capital works deductions they have claimed on those improvements each year. The result is an understated capital gain, which can lead to ATO amendments, tax shortfall penalties, and interest charges.

Impact example: If you claimed $20,000 in capital works deductions over a 10-year period and fail to add these back, your capital gain is understated by $20,000. At a 37% marginal rate (after the 50% discount), that represents an understatement of tax of $3,700. ATO interest and penalties could add significantly to this amount.

Including Costs You Already Claimed as Tax Deductions

If you claimed interest on your investment loan, council rates, insurance, or property management fees as deductions in your annual tax returns, you cannot also include these in your cost base. The same dollar can only be used once: either as a current-year deduction or as a cost base component, never both.

A common scenario is property owners who include loan interest in their cost base on the belief that it “cost them money to own the property.” For income-producing properties, interest is deductible each year and therefore cannot appear in the cost base under Element 3.

Confusing Repairs and Maintenance With Capital Improvements

The distinction matters enormously. A repair restores an asset to its original condition; a capital improvement makes it better or creates something new. Repairs and maintenance are deductible immediately if the asset is income-producing, but they do not go into the cost base. Capital improvements go into the cost base but are not immediately deductible.

Use this decision framework:

• Replacing a broken tile: repair, deductible now, not in cost base
• Replacing the entire bathroom with a modern fit-out: capital improvement, goes in cost base, not immediately deductible
• Fixing a leaking roof (like-for-like): repair, deductible now
• Adding a second storey to the home: capital improvement, goes in cost base
• Repainting after tenants leave: repair, deductible now
• Replacing all windows with double-glazed units: capital improvement, goes in cost base

When in doubt, consider whether the work restores (repair) or enhances (improvement). If the result is materially better than what existed before, it is likely a capital improvement.

The 6-Year Rule and CGT Compliance

In the context of cost base, the “6-year rule” most commonly refers to the main residence exemption rule that allows you to treat a former main residence as your main residence for up to six years while it is rented out, provided you do not have another main residence. This can affect how you calculate the partial CGT exemption and, therefore, the relevant cost base period.

From a compliance perspective, the ATO generally has two years to review individual tax returns with straightforward affairs (four years for others). However, if you make a false or misleading statement, there is no time limit on the ATO’s ability to amend. For CGT, the ATO’s data-matching programs capture property sales through state revenue offices and real estate agent reports, so unreported gains are regularly identified.

Where you have made a genuine error in calculating your cost base, it is generally better to seek an amendment voluntarily before the ATO identifies the issue, as voluntary disclosure is taken into account in determining penalty amounts.

Key Takeaways and Next Steps

Your cost base is the most powerful tool available to reduce your capital gains tax liability, and the rules are more generous than most Australians realise. Here is a summary of the key principles to remember:

• Cost base has five elements: acquisition costs, incidental costs, ownership costs (for non-income-producing assets only), capital improvement costs, and title costs.
• You cannot include costs that have already been claimed as a tax deduction. These two treatments are mutually exclusive.
• Capital works deductions claimed on rental properties must be subtracted from your cost base on sale, even if you chose not to claim them in a given year.
• Capital improvements (renovations, extensions, structural upgrades) increase your cost base. Repairs and maintenance do not.
• The 50% CGT discount halves the taxable gain for individuals who have held an asset for more than 12 months, and it is applied after the cost base calculation, not as part of it.
• Pre-CGT assets (acquired before 20 September 1985) are generally exempt, but significant improvements may create a separate CGT liability.
• Keep all relevant documents for the entire ownership period plus five years after the sale. This is not optional; it is a legal requirement.

If you are planning to sell an investment property, shares, or any other capital asset, gathering and reviewing your cost base records before the sale, rather than after, gives you the best opportunity to ensure every legitimate cost is captured. A registered tax agent with experience in CGT can help you identify costs you may have overlooked, correctly apply the capital works add-back rules, and ensure your tax return reflects the lowest lawful tax liability.