Edited version of private ruling

Authorisation Number: 1011597270166

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Ruling

Subject: Capital gains tax (CGT): Legal expenses/Cost base

Question

Are you entitled to include part of your legal expenses in the cost base of Properties A, B and C as expenditure to establish, preserve or defend title?

Answer:

No.

Relevant facts and circumstances

Your spouse (the deceased) passed away.

You and the deceased were tenants in common in ownership of Properties A, B, and C (the properties).

Under the conditions of the deceased's Will, their ownership interests in the properties were to be sold (under Schedule One) or directed to their three family members (under Schedule Two).

Under Schedule two of the Will, you were directed to transfer, free of consideration, all your right title and interest in the properties to the three family members of the deceased.

You then stood to receive:

· -a sum of money

· -title and interest of Property D, and

· -the deceased's interest in Property E.

The family members of the deceased were instructed to pay all costs and expenses in relation to the transfer of the properties in addition to any capital gains liability payable by you in respect to the transfer of the properties.

Following the reading of the Will, long and protracted legal proceedings ensued.

There were insufficient funds in the estate to enable the sum of money to be paid to you, and the estate could not guarantee that other property held in trust would not be sold in order to raise funds.

The legal proceedings also included the dispute regarding an unpaid loan where you sought recovery of the monies paid to the estate.

You incurred legal expenses.

You estimate that 40% of this amount is attributable to the legal dispute surrounding the properties.

You sold the properties.

Reasons for decision

Subsection 110-25(6) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that capital expenditure you incur to establish, preserve or defend your title to the asset or a right over the asset will form the fifth element of the cost base. 

Legal expenses relating to defending your title or right to an asset will generally fall within the fifth element of the asset's cost base.

Under the Will, the deceased's interests in properties was to be sold (under schedule one) or transferred to the family members of the deceased (under schedule two). As such you did not have a right to the deceased's interests in the properties. Furthermore, your own interest in properties was never in dispute or under threat. Therefore, you are not entitled to include part of your legal expenses in the cost base of properties A, B and C as expenditure to establish, preserve or defend title.

However, under the Will you do have a right to ownership of properties D and E.

As ownership of these properties were contested and you were likely to lose your entitlement to your interest in these properties under the terms of the Will, the legal costs attributable to preserving your interest in properties D and E can be included in the fifth element of their cost base.