Quick Summary
- What it is: The cost base is what you subtract from sale proceeds to work out a capital gain or loss. The bigger your cost base, the smaller your gain.
- Five elements: Purchase price; incidental costs (legal, stamp duty, brokerage); ownership costs (rates, insurance — non-deductible only); capital improvements; costs of defending title.
- Big exclusion: Anything you've already claimed as a tax deduction can't go in the cost base. Capital works deductions on rental properties are the trap.
- Reduced cost base: Used for losses. Same elements except the third (ownership costs) is replaced by balancing adjustment amounts.
- Why it matters more from 2027: Under the new CPI indexation method, an accurate cost base is the basis of your inflation uplift — getting it right will save more tax than under today's flat discount.
The cost base is the number you subtract from your sale proceeds to work out a capital gain or loss. Get it right and you might shave thousands off your CGT bill; get it wrong and you'll either overpay or end up arguing with the ATO. This guide walks through the five elements of the cost base, how the reduced cost base differs for losses, and the most common mistakes investors make.
What the Cost Base Actually Is
The cost base of a CGT asset is, broadly, what it cost you to buy the asset plus the costs of owning and disposing of it. When you sell, the gain (or loss) is your capital proceeds minus the cost base. The ATO defines the cost base as the sum of five distinct elements, set out in detail on the cost base of assets page. The trick is that not every cost qualifies, and any cost you've already claimed as an income tax deduction can't be included as well — that would be double-dipping.
The Five Elements at a Glance
| Element | What it covers | Common examples |
|---|
| 1. Money paid for the asset | The purchase price itself | Share parcel cost, property contract price |
| 2. Incidental costs | Costs of acquiring or disposing of the asset | Legal/conveyancing, stamp duty, brokerage, agent fees, valuations |
| 3. Costs of owning | Holding costs — only if not deductible | Rates and land tax on vacant land, non-deductible interest, insurance |
| 4. Capital improvements | Capital spending to increase or preserve value | Extensions, renovations, replacing a roof, zoning change applications |
| 5. Defending title | Legal costs to preserve ownership or rights | Paying a call on shares, defending a boundary dispute |
The Five Elements in Detail
1. Money paid or property given for the asset
The purchase price. For shares, that's what your broker charged you for the parcel. For property, it's the contract price. If you paid for the asset partly in cash and partly with another asset, you use the market value of the other asset at the time of the transaction.
2. Incidental costs of acquiring or disposing of the asset
The ATO lists ten specific incidental costs. The ones that typically matter for individual investors:
- Legal fees, conveyancing, valuation, agent and broker fees
- Stamp duty or transfer duty
- Borrowing expenses such as loan application fees and mortgage discharge fees
- Advertising or marketing to find a buyer or seller
- Search fees on land titles
- Tax advice fees from a recognised tax adviser, provided the advice was given after 30 June 1989
Travel costs to inspect a property before buying are not incidental costs and don't count.
3. Costs of owning the asset
This is the element investors most often misunderstand. The third element covers rates, land tax, repairs, insurance premiums, and non-deductible interest on loans used to acquire or improve the asset. Sounds generous — but the catch is that these costs can only be included if they weren't deductible against your income tax. For most investment properties, rates and land tax are already deducted against rental income, so they can't also go into the cost base. This element is mainly useful for vacant land you've held without income, or assets you've held for personal rather than income-producing reasons.
Three more limits on the third element: you can't index it for inflation, you can't use it to create or increase a capital loss, and it only applies to assets acquired on or after 21 August 1991.
4. Capital costs to increase or preserve the value of the asset
Money you spent on capital improvements — extensions, renovations, replacing a roof, applying for a zoning change. The work has to be capital in nature, not deductible repair work. If you replaced rotten weatherboards with the same product, that's likely a repair (deductible). If you replaced them with a brick veneer, that's capital improvement (cost base). The line is fuzzy in practice; for big-ticket items, get it documented by a quantity surveyor or tax agent before you sell.
5. Capital costs of preserving or defending your title to the asset
Legal costs of defending your ownership — for example, paying a call on partly-paid shares, or legal fees in a boundary dispute over an investment property. Rare but worth knowing about.
The Reduced Cost Base (For Losses)
The reduced cost base is the version you use when working out a capital loss. It has the same five elements except for one substitution: the third element (costs of owning the asset) is replaced by any "balancing adjustment amount" — usually a technical adjustment for assets that have been subject to capital allowance claims. For most individuals selling shares or property at a loss, the reduced cost base ends up close to your original cost base minus any deductions you've claimed along the way. You also can't index the reduced cost base, because indexation isn't available for capital losses.
What You Can't Include
The ATO is explicit about a handful of categories that never go into the cost base:
- Anything you've claimed as a tax deduction. The big one for property investors is capital works deductions (the 2.5% per year deduction for the construction cost of the building). Those amounts must be subtracted from the cost base when you sell. The ATO's worked example shows how easily this is missed — Danuta bought an asset for $100,000 in 2012 and claimed $7,500 in capital works deductions; her reduced cost base when she sold was $92,500, not $100,000.
- Foreign currency amounts not converted to AUD. If you bought shares on a US broker for USD 50,000, you have to convert to AUD using the exchange rate on the transaction date, not the rate when you sell.
- GST input tax credits for GST-registered businesses. If you claimed back the GST on a purchase, that GST amount comes out of the cost base.
- Recouped expenditure. If the vendor refunded some of your legal fees at settlement, only the net amount you actually bore is in the cost base.
- Heritage conservation and landcare expenditure that gave rise to a tax offset (for assets acquired after 13 May 1997).
Common Mistakes
Five errors come up repeatedly when people work out their own CGT:
- Including costs already deducted. The number one mistake. If you've claimed it on a previous tax return, it doesn't belong in the cost base. Capital works deductions on a rental property are the easiest one to miss because they accumulate quietly over years.
- Forgetting brokerage and stamp duty. The opposite mistake. Investors often calculate gain as "sale price minus purchase price" and skip the second element entirely. Brokerage on a $50,000 share trade might be $50 — but stamp duty on a $700,000 investment property is closer to $30,000. That's a big chunk of cost base.
- Confusing repairs and improvements. Repairs are deductible against rental income; improvements go into the cost base under the fourth element. Mixing them up means either claiming the same thing twice or missing it in both places.
- Not adjusting for the third element rules. Investors sometimes try to include rates and land tax for a rental property in the cost base, having already deducted them. You can't have both.
- Poor records. The ATO can ask for documentation up to five years after the CGT event — longer if you've used capital losses to offset later gains. For an asset held 20 years, that means keeping receipts, contracts and improvement invoices going back two decades. The ATO's CGT record keeping tool is worth using from day one for any significant asset.
Why It Matters for the 50% Discount and 2027 Changes
An accurate cost base feeds directly into both the current 50% CGT discount calculation and the new CPI-indexation method coming in from 1 July 2027 under the CGT and negative gearing reforms. Under either system, the cost base is the starting point. Under indexation, it's even more sensitive — the bigger the cost base, the bigger the inflation uplift, and the smaller your real gain. Time spent on accurate records now pays off twice once the new rules take effect.
Frequently Asked Questions
The cost base of a CGT asset is generally what you paid for it plus the other costs of acquiring, owning, and disposing of it. It's the figure you subtract from your sale proceeds to work out your capital gain or loss. The ATO defines five elements of the cost base.
1. Money paid or property given for the asset. 2. Incidental costs of acquiring or disposing of the asset (legal fees, stamp duty, brokerage, advertising). 3. Costs of owning the asset (rates, land tax, insurance, repairs) — only if not deductible. 4. Capital costs to increase or preserve the asset's value. 5. Capital costs of preserving or defending your title to the asset.
Yes, but only if they were not deductible against your income tax in the year you incurred them. The third element of the cost base typically only applies to vacant land or assets you held for personal rather than income-producing purposes. If you claimed rates or land tax as a rental property deduction, you cannot also include them in the cost base.
The reduced cost base is what you use to work out a capital loss. It has the same first, second, fourth and fifth elements as the cost base, but the third element is replaced with any "balancing adjustment amount" assessable in connection with the asset. You can't index the reduced cost base.
The five most common errors: (1) Including costs you've already claimed as a tax deduction — these must be excluded. (2) Forgetting to subtract capital works deductions on rental properties. (3) Not converting foreign currency amounts to AUD at the transaction date. (4) GST-registered businesses failing to back out input tax credits. (5) Missing brokerage, stamp duty or legal fees that would have legitimately increased the cost base.
Disclaimer: This guide provides general information about the CGT cost base in Australia and is not financial or tax advice. CGT rules are detailed and individual circumstances vary — particularly around capital works, foreign currency and inherited assets. Always refer to the official ATO website for the latest information, and consult a qualified tax professional for advice on your specific situation.
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