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Edited version of your written advice
Authorisation Number: 1012818732837
Ruling
Subject: Capital gains tax cost bases
Question
Can you include legal fees incurred in having the title released in the cost base of your property?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2014.
The scheme commences on:
1 July 2013.
Relevant facts and circumstances
You and your investment partner jointly purchased and mortgaged a property to the bank in the 200X financial year.
You and your investment partner then subdivided the block into two lots.
Your investment partner built a dwelling on the second block.
Several years later, you and your investment partner transferred ownership interests in each of your blocks to the effect that you were the sole owner of a whole block each.
Throughout the subdivision and the transfers of titles, the loan arrangements and mortgage over the property did not change.
You discharged the mortgage but your investment partner subsequently refused to release you from the loan.
You had to pursue legal avenues to have your name and title released from the bank prior to selling your property.
You incurred $X in legal expenses to have your name and title released.
Relevant legislative provisions
Income Tax Assessment Tax 1997 section 110-25.
Reasons for decision
Cost base
The cost base of a capital gains tax (CGT) asset is generally the cost of the asset when you acquired it. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset.
Section 110-25 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out items that can be included in the cost base of a CGT asset. For assets acquired after 1 July 2005 the cost base is made up of five elements:
1. The first element is made up of the money paid or required to be paid to acquire the CGT asset.
2. The second element will include incidental costs of acquiring the asset, or costs in relation to the CGT event. Examples are agent's commission, advertising to find a seller or buyer, fees paid to an accountant.
3. The third element consists of non-capital costs incurred in connection with their ownership of a CGT asset. Examples are interest, rates, repairs and insurance premiums. An individual can include non-capital costs of ownership only in the cost base of assets acquired after 21 August 1991.
4. The fourth element includes capital expenditure the individual incurs for the purpose or the expected effect of increasing or preserving the assets' value or that relates to installing or removing the asset.
5. The fifth element includes capital expenditure the individual incurs to preserve or defend their title or rights to the asset.
Subsection 110-25(6) of the ITAA 1997 states that the fifth element of the cost base is capital expenditure you incurred to establish, preserve or defend your title to the asset, or a rights to the asset.
However, you do not include costs in the cost base if you have claimed a tax deduction for in any year or did not claim a deduction for but can still claim it because the period for amending the relevant income tax assessment has not ended.
In your case, your investment partner did not agree to release your name from the mortgage. You were therefore unable to sell your property, as is your right as sole owner. You were forced to pursue the matter through legal proceedings resulting in $X in legal costs. Accordingly, your legal expenses were paid in connection with defending your rights to your asset and are therefore a capital expenditure cost, which is included in the fifth element of the asset's cost base.
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