Edited version of private ruling

Authorisation Number: 1011471410808

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Ruling

Subject: Capital gains tax - cost base - fifth element.

Question 1:

Will the payment of compensation made to your children form part of the cost base?

Answer:

Yes.

Question 2:

Will the payment of legal and other costs incurred as part of legal proceedings form part of the cost base?

Answer:

Yes.

This ruling applies for the following periods:

Year ended 30 June 2010, and

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You and your spouse divorced overseas some years ago

Some property assets were divided and set up as a Trust Deed at this time to provide for the maintenance and education of your three children (beneficiaries).

At this time the children were minors.

You and your spouse were joint trustees.

Under the trust deed, the net sale proceeds of certain specified real estate was to be divided multiple ways, between you and your spouse and the children.

You and your spouse took your share and the children's share was to be held on trust for them until they attained the age of twenty five, pending which income was to be applied for their benefit until that time, and then added to capital.

Following the breakdown of the marriage you moved to Australia with your children where you supported them as a sole parent.

Two main clauses, among others in the Trust Deed stated that the Trustees shall hold the shares of the children in trust for them until each child attains the age of twenty five. The Trustees shall during the trust period of the minor beneficiaries pay or apply the income of the trust fund to or for the maintenance, education or support or otherwise for the benefit of all or any of the minor beneficiaries in such shares and manners as the Trustees think fit.

Under section 38 (1) of the Trustee Act 1958 a trustee is empowered to apply up to half the trust capital for the maintenance, education and advancement or benefit of the beneficiaries, subject to any contrary intention expressed in the trust instrument.

The trust funds arrived in several stages over five years, as the properties were sold.

As trustee you owed a number of duties which included strictly adhering to the terms of the trust deed.

The terms of the trust deed were not met by you as trustee.

No trust distribution was made to the children when each turned twenty five as the trust had effectively been exhausted a number of years later.

Your former spouse passed away and your children became aware of the Trust Deed which was put in place as they were now over the age of 25.

Your children served you with court ordered affidavits which made allegations of breach of trust and made claims on the current properties that you owned.

Your children (plaintiffs) contended that as beneficiaries of the trust they were entitled to an equitable proprietary interest in the properties that you owned:

You represented yourself in The Supreme Court to defend your ownership rights to these properties.

The judgment issued by the Supreme Court ordered you to make payments by way of equitable compensation to the plaintiffs.

Legal and other costs were incurred to obtain legal advice and assistance.

The above is a summary of the scheme that has been extracted from the following documents, which are to be read with and form part of the scheme for the purpose of this ruling:

· Private ruling application form

· Transcript of proceedings, Supreme Court

· Trust Deed

· Affidavits

· Originating Motion

· Amended Originating Motion

Reasons for decision

The cost base of a CGT asset is generally the cost of the asset when you bought it. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset. There are 5 elements in the cost base:

· First element: money or property given for the asset

· Second element: incidental cost of acquiring the CGT asset or that relate to the

CGT event

· Third element: costs of owning the asset

· Fourth element: capital costs to increase or preserve the value of your asset

or to install or move it

· Fifth element: Capital costs of preserving or defending your ownership of or rights to your asset.

The fifth element of the cost base relates to capital costs of preserving or defending your ownership of or rights to your asset. In your case your children initiated legal action and attempted to claim interests in your properties that were registered in your name. You defended yourself against the claims made by your children. The legal fees that you incurred in defending the claims made by your children are included in the fifth element of the cost base of the properties because if you had not taken the action the court may have allowed the claims and your interest in the properties may have been transferred to your children.

However, the payment of compensation that you were required to pay to your children is not included in the fifth element of the cost base of the properties. Once the court had largely dismissed your children's claims your properties were no longer threatened. The compensation payments were awarded due to the wrong you committed in your role as trustee and have not been made to defend or preserve your interests in the properties.

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