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Edited version of your written advice
Authorisation Number: 1012714571698
Ruling
Subject: Capital gains tax
Questions and answers:
1. Are you entitled to include the $XXX,XXX borrowed to pay claimants entitlements in the cost base when calculating a capital gain?
No.
2. Are you entitled to include a portion the legal fees in the cost base when calculating a capital gain?
Yes.
This ruling applies for the following periods:
Year ending 30 June 2014
The scheme commenced on:
1 July 2013
Relevant facts and circumstances
Your parent died a number of years ago.
You were the executor to their estate.
Before probate was granted a challenge to the will was made.
A deed of settlement was entered into in which three siblings became entitled to $XXX,XXX of the estate and other beneficiaries were entitled to a total of $XX,XXX with the remainder left to you.
You as the executor incurred legal fees.
The estate consisted of the house, small amount of cash and personal assets.
Instead of selling the house and using the proceeds to pay the other beneficiaries you decided to borrow the money (as trustee/beneficiary you did not want to sell the house).
You also borrowed the money to pay for legal fees.
Clause 1 of the will states:
1. In respect of all property vested in my trustee the power of a trustee for sale
You were given title to the house.
You have now sold the house.
Relevant legislative provisions:
Income Tax Assessment Act 1997 Section 102-20
Income Tax Assessment Act 1997 Section 110-25
Reasons for decision
A capital gain or capital loss is made as a result of a capital gains tax (CGT) event happening to a CGT asset (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)). The most common CGT event is CGT event A1 the disposal of a CGT asset.
The cost base of a CGT asset is generally the cost of the asset when a taxpayer bought it. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset.
In order to work out how much a taxpayer's capital gain or capital loss is, a taxpayer must first establish the cost base or reduced cost base of a taxpayer's ownership interest in the property.
Section 110-25 of the ITAA 1997 states that the cost base of a CGT asset is made up of five elements.
1. Money you paid for the asset.
2. Incidental costs of acquiring the property, they are:
• Fees paid to a surveyor, value, auctioneer, accountant, broker, agent, consultant or legal adviser (you can only include the cost of advice concerning the operation of the tax law as an incidental cost if the advice was provided by a recognised tax adviser)
• Costs of transfer
• Stamp duty or other similar duty
• Costs of advertising or marketing (but not entertainment) to find a buyer
• Costs relating to the making of any valuation or apportionment to determine your capital gain or capital loss
• Search fees (such as fees to check land titles and similar fees
• The cost of a convincing kit (or a similar cost), and
• Borrowing expenses (such as loan application fees and mortgage discharge fees).
Note: You do not include costs if you:
• have claimed a tax deduction for them in any year, or
• omitted to claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not expired.
3. Costs of owning the asset including:
• Rates, land taxes, repairs and insurance premiums
• Non-deductible interest on borrowings to finance a loan used to acquire a CGT asset and on loans used to finance capital expenditure you incur to increase an assets value.
Note: You do not include costs if you:
• have claimed a tax deduction for them in any year, or
• omitted to claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not expired.
4. Capital costs to increase or preserve the value of your asset or install or move it, such as:
• Costs of applying for zoning changes
• Costs of demolition and
• Construction costs.
5. Capital costs of preserving or defending your ownership of or rights to your asset.
In your case you borrowed the amount to pay the claimants who were successful in challenging your parents will.
The estate did not have enough cash to pay the claimants entitlements without the house being sold which you had inherited under your parents will.
The amount of $XXX,XXX cannot form part of the 4th and 5th element of the cost base when calculating the capital gain as it was your personal choice to borrow the money to pay the claimants rather than sell the house to give the claimants their entitlement.
The will gave you the power to sell the assets under clause 1.
Your situation can be distinguished from ATOID 2004/425 as in the case of the ATOID the person who was making a claim on the estate argued they had a life interest in the property of the estate and in order for the property to be sold the Trustee of the estate entered into a settlement agreement so that the property could be sold as vacant premises and so that the claimant would surrender any future claims on the estate.
The legal fees can be included in the cost base and will need to be apportioned across all the assets of the estate and not just the house.
You are then able to include the portion of the legal fees which relates to the property in the cost base.