Quick answer
ITAA 1997 s110-25 sets out five cost base elements: the acquisition cost, incidental costs of acquiring or disposing, ownership costs, capital improvements, and the costs of establishing or defending title. Where the law substitutes market value for what was actually paid, element one comes from a valuation rather than from the contract.
The five elements
Section 110-25 of the ITAA 1997 sets out five elements. They are cumulative: the cost base is their sum.
- Element 1 — money paid, or the market value of property given, to acquire the asset. This is the element a valuation establishes when there was no arm’s length purchase price, or when a market value is substituted or deemed.
- Element 2 — incidental costs of acquiring or disposing: stamp duty, agent commission, legal fees, valuation fees, advertising, conveyancing.
- Element 3 — costs of owning the asset: rates, land tax, insurance, interest and repairs. Available only for assets acquired after 20 August 1991, and not where the cost has been claimed as a deduction.
- Element 4 — capital expenditure to increase or preserve value, including capital improvements and structural work.
- Element 5 — capital expenditure to establish, preserve or defend title to the asset.
Where the valuation fits
Element 1 is a factual figure when the property was bought on the open market: the contract price. It becomes a valuation question whenever the law substitutes or deems market value — a transfer between related parties, an inheritance of a pre-CGT asset, or a former home first used to produce income under s118-192.
Element 4 can also require valuation input on complex properties, where an apportionment between land and improvements, or between capital and repair expenditure, is contested.
What cannot go in
Every one of these has been argued to us by a client at some point, and none of them holds.
- Anything already claimed as a tax deduction — including interest and rates where element 3 would otherwise apply.
- Your own labour on renovations. Unpaid time is not expenditure.
- Costs that relate to a different asset, such as improvements to a second property on the same title after subdivision.
- Repairs and maintenance, which are revenue rather than capital in character.
- Amounts recouped from an insurer or a government grant.
Cost base, reduced cost base, and indexation
Where the asset is sold at a loss, the reduced cost base applies instead. It excludes element 3 entirely and is adjusted for amounts such as claimed capital works deductions. For assets acquired before 21 September 1999 there is also a choice between the indexation method and the CGT discount — a choice for your accountant, though it affects which cost base figure matters.
None of this changes the valuation. A valuation gives market value at a date; how that figure is used in the calculation is a tax question. But it does explain why your accountant sometimes needs more than one date, or a split between land and improvements.
Questions we are asked about this
Is the valuation fee itself part of the cost base?
Generally yes — a valuation fee incurred in connection with acquiring or disposing of the asset is an element 2 incidental cost. Confirm the treatment with your accountant, as it depends on the purpose the valuation was obtained for.
Does the cost base include GST?
For most residential property held by individuals, yes, because there is no input tax credit. Where the owner is registered and entitled to a credit, the cost base excludes the credited amount.
Can I add renovations I paid cash for with no receipts?
Element 4 requires expenditure you can substantiate. Without records the safer path is a valuation that reflects the improved condition at the relevant date, which captures the value of the work without asserting an unsupported figure.
Keep reading
Sources
- Income Tax Assessment Act 1997 — Consolidated Act, AustLII
- Market valuation for tax purposes — Australian Taxation Office — the eight valuation fundamentals
- Australian Property Institute — Professional Practice Standards and the CPV designation
This page is general information about how valuations are used for tax purposes. It is not tax advice. Your accountant or tax agent should confirm which provision applies to your circumstances.
Written and reviewed by
Jarrad Khoury
Head of Valuations at Asset Valuations Group, where he leads the Business Valuation Services division. Over 10 years in property and business valuation. Registered Valuer in Queensland (Not Limited), Licensed Valuer in Western Australia (Not Limited), CPV through the Australian Property Institute (Not Limited), CPV and CBV through the Australian Valuers Institute, and Registered Business Valuer through the AIBB.
Last reviewed 15 September 2026 · About the practice · Editorial policy