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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your private ruling

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Ruling

Subject: CGT - cost base

Do the legal fees you incurred form part of the cost base of the asset?

No.

This ruling applies for the following period

1 July 2011 to 30 June 2012

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You and your spouse own a commercial property as joint tenants.

You had a dispute with you spouse regarding the property which resulted in legal action through the family court.

The family law court order states at point 1; the parties shall forthwith do all such things and sign all such documents as are necessary to cause the property be sold at the best price reasonable obtainable and upon completion disburse the proceeds of sale.

You have paid a sum for legal fees and interest charges for legal fees outstanding.

You have paid an amount for a forensic accounting report.

You have provided a tax invoice from the solicitors & Barristers in relation to preparing your case for court.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 110-25

Income Tax Assessment Act 1997 subsection 110-35(2)

Reasons for decision

The cost base of a Capital Gains Tax (CGT) asset is defined in section 110-25 of the Income Tax Assessment Act 1997 (ITAA 1997). It consists of five elements:

 

1.      money paid in respect of acquiring the asset

2.      incidental costs incurred in acquiring the asset

3.      non-capital costs of ownership of the CGT asset

4.      capital expenditure incurred to increase the asset's value

5.      capital expenditure incurred to establish, preserve or defend your title to the asset

Your capital gain or loss is generally calculated by subtracting the cost base from the capital proceeds.

Legal fees

Remuneration for the services of a legal adviser is included as an incidental cost for cost base purposes by subsection 110-35(2) of the ITAA 1997. Incidental costs, however, need to be incurred to either acquire a CGT asset or relate to a CGT event.

The legal fees you incurred were in preparation for the family court hearing and not for the sale of the property; therefore they do not form part of your cost base.

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