Edited version of your written advice

Authorisation Number: 1012701872799

Ruling

Subject: Legal fees

Question 1

Will the legal costs incurred by the estate in relation to the dispute concerning the deceased's will, form part of the cost bases of the assets of the estate pursuant to subsection 110-25(6) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes

Question 2

Will the legal costs incurred by the estate in relation to the dispute concerning the deceased's will, on behalf of beneficiary A (as part of a court order), form part of the cost bases of the assets of the estate pursuant to subsection 110-25(6) of the ITAA 1997?

Answer:

Yes

Question 3

Will the legal costs incurred by beneficiary B in relation to the dispute concerning the deceased's will, form part of the cost bases of the assets of the estate pursuant to subsection 110-25(6) of the ITAA 1997?

Answer:

No

Question 4

Will 90% of the executor fees incurred by the estate, which relate to the dispute concerning the deceased's will, form part of the cost bases of the assets of the estate pursuant to subsection 110-25(6) of the ITAA 1997?

Answer:

Yes

Question 5

Should the legal costs, and 90% of the executor fees, that relate to the dispute concerning the deceased's will, be apportioned across the assets of the estate pursuant to subsection 112-30(1A) of ITAA 1997?

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

X passed away.

The assets of X's estate, (as per values disclosed on grant of probate), included some properties and a share portfolio.

The original will left monies to various charitable institutions, and some money and interest in property beneficiary A and the residual interest to Beneficiary B.

Beneficiary A disputed the will and took out legal proceedings seeking an order from the Supreme Court that they would receive a further sum.

Eventually, a further sum was awarded to beneficiary A.

Due to the negotiations, discussions and court hearings it has taken several years from the date of X's death to finalise the estate.

Legal costs incurred and paid for by the estate have amounted to $XXX.

Legal costs incurred for beneficiary A in disputing the estate amounted to $XXX. Legal costs were incurred by the estate on behalf of beneficiary A as ordered by the court.

The executors have been paid fees of $XXX, of which 90% of the fees relate to the dispute over the assets of the estate. The remaining 10% relate to the administration of the income-producing assets of the estate.

Beneficiary B also incurred legal fees of approximately $XXX in relation to the dispute. These fees were not incurred, or paid, by the estate.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1997 Section 128-15

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Subsection 110-25(6)

Income Tax Assessment Act 1997 Subsection 112-30(1A)

Reasons for decision

As the executor of the deceased estate, you are a legal personal representative of the deceased as defined under subsection 995-1(1) of the ITAA 1997. On the death of the deceased, the assets of the deceased devolved to you, the deceased's legal personal representative. Pursuant to section 128-15 of the ITAA 1997, you are taken to have acquired the deceased's bequeathed assets on the deceased's date of death.

Disputes over entitlements to a deceased estate may lead to legal expenditures by beneficiaries of the estate and by the legal personal representative or executor. In most cases, expenditures to establish or preserve a taxpayer's interest in a capital asset are considered non-deductible capital expenses.

In contrast, expenses that relate to the administration of the income-producing assets of the estate would normally be deductible under section 8-1 of the ITAA 1997.

Non-deductible capital expenses to preserve or establish title to assets can be added to the cost base of the asset for capital gains tax (CGT) purposes. Section 110-25(6) ITAA 1997 provides that the fifth element of the cost base of a CGT asset to a taxpayer includes capital expenditure you incurred to establish, preserve or defend your title to the asset, or a right over the asset.

As explained in ATO Interpretative Decision ATO ID 2001/730;

Defending the taxpayer's title or right seems to refer to action taken when the title or right is put in dispute. The most obvious example of this is where someone else lays a claim to the asset in whole or in part and institutes legal proceedings to establish that claim. Costs of the taxpayer in defending those proceedings would be costs in defending the taxpayer's title.

ATO ID 2001/730 further explains that expenditure incurred to establish, preserve or defend title to the estate assets may need to be apportioned across the various assets of the estate in accordance with subsection 112-30(1A) of the ITAA 1997.

Subsection 112-30(1A) of the ITAA 1997 provides that is a taxpayer incurs expenditure and only part of it relates to another element of the cost base or reduced cost base of a CGT asset, that element includes that part of the expenditure that is 'reasonably attributable' to that element.

Application to your circumstances

Legal costs - Estate

As executor of the deceased estate you incurred legal costs of $XXX in establishing, preserving or defending title to the assets, or a right over the assets, of the estate. Accordingly, the legal costs form part of the cost base of the estate assets pursuant to subsection 110-25(6) of the ITAA 1997.

The legal costs should be reasonably apportioned across the various assets of the estate pursuant to subsection 112-30(1A) of the ITAA 1997.

Legal costs - beneficiary A

As executor of the deceased estate you incurred legal costs of $XXX on behalf of beneficiary A (as ordered by the court) in establishing, preserving or defending title to the assets, or a right over the assets, of the estate. Accordingly, the legal costs form part of the cost base of the estate assets pursuant to subsection 110-25(6) of the ITAA 1997.

The legal costs should be reasonably apportioned across the various assets of the estate pursuant to subsection 112-30(1A) of the ITAA 1997.

Legal costs - beneficiary B

You did not incur legal costs on behalf of beneficiary B. You did not pay legal costs on behalf of beneficiary B. Accordingly, there are no costs relating to beneficiary B's legal fees that are eligible to be added to the cost base of the estate's assets.

Executor fees

The role of the executor of a deceased estate is to correctly administer the estate in accordance with the will of the deceased. This involves dealing with the assets of the estate and hence the expenses incurred in relation to the assets will generally be capital in nature.

The executor/personal representative's remuneration is treated as an expense of the trust. If the estate has income-producing assets, the expense is normally deductible by the deceased estate under section 8-1 of the ITAA 1997 as an outgoing incurred in the gaining or producing of assessable income. However, if an executor/personal representative is unable to establish a connection between expenses incurred by the estate and the production of assessable income, the expenses are not deductible to the deceased estate.

In this case, 90% of the fees paid to the executor of the estate relate to the dispute over the assets of the estate, therefore, the fees will be considered to be capital expenditure incurred to establish, preserve or defend your title to the asset, or a right over the asset. Accordingly, 90% of the executor fees form part of the cost base of the estate assets pursuant to subsection 110-25(6) of the ITAA 1997.

The fees should be reasonably apportioned across the various assets of the estate pursuant to subsection 112-30(1A) of the ITAA 1997.

However, the remaining 10% of the executor fees relate to the administration of the income assets of the estate and are deductible under section 8-1 of the ITAA 1997.