Edited version of your written advice

Authorisation Number: 1012717309467

Ruling

Subject: CGT asset cost base

Question 1

Are you entitled to include the following expenditure in the cost base of your property?

• Legal expenses incurred in defending title or right of a CGT asset

• Council rates

• State land tax

Answer

Yes.

Question 2

If you do not receive all of the compensation for your legal expenses, are you able to apportion the remaining net legal expenses over the two unsold properties?

Answer

Not valid.

This ruling applies for the following period:

Year ended 30 June 2014

Year ending 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

Subsequent to your parent's death, you acquired a vacant, non-income producing block of land.

Conflict between the provisions of a will and a previous agreement concerning the future ownership of the property necessitated legal action to preserve your ownership.

Judgment handed down by the Court was held in your favour.

An order was made that the opponent pays an amount of your costs for the proceedings.

You are unsure of how much of these proceeds you will receive or when you will receive them.

You wish to include your net legal expenses incurred in defending your ownerships to the property in the cost base of the property.

The conflict involved a number of lots of land.

In the financial year just passed, you sold X of the lots. The remaining Y lots will be sold in the current financial year.

You have also incurred council rates and state land tax on the property. You are not entitled to deduct these expenses elsewhere.

Relevant legislative provisions

Income Tax Assessment Act 1997 (ITAA 1997) section 110-25

Reasons for decision

Question 1

Detailed reasoning

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 following elements are included in the asset's cost base:

• The first element, being the acquisition costs, is the total of the money paid, or required to be paid, in respect of the acquisition. 

• The second element is the incidental costs that the taxpayer incurs in acquiring the asset of which relate to a CGT event that happens in relation to the asset.

• The third element is costs of ownership, including both capital and non-capital costs.

• The fourth element is capital costs associated with increasing or preserving the value of your asset, or installing or moving the asset.

• The fifth element is capital expenditure incurred by a taxpayer in establishing, preserving or defending their title to an asset, or right over an asset.

In your case, you have incurred legal expenses in defending your ownership rights to the property, which you acquired a number of years ago. Accordingly, you are entitled to include this expense in the fifth element of the property's cost base.

You have incurred council rates and a state land tax on your property, which you are unable to deduct under any other provision of the ITAA 1997 or the ITAA 1936. Accordingly you are entitled to include this expenditure under the third element of the property's cost base.

Question 2

Detailed reasoning

By court order, you are to receive an amount of your legal expenses from the defendant. As such, you intend to claim the residual of the legal expenses you incurred in the cost base of your CGT assets.

It is uncertain when you will receive this amount, or how much of the proceeds you will actually receive. As such, you are uncertain how to apportion the proceeds which you may or may not receive, over the three properties to which it relates.

Your request to receive advice regarding how you could apportion these expenses and their subsequent recoupment over the cost base of the properties constitutes financial advice and is outside of the nature of services we provide. As such, this question is not valid. While we cannot provide financial advice on the matter, please find the following general information regarding the apportionment of compensation receipts.