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Edited version of your written advice
Authorisation Number: 1012719831420
Ruling
Subject: Cost base
Question 1
Does the payment made to C form part of the Trustee's cost base for the Property under subsection 110-25(5) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes
This ruling applies for the following period:
Income year ending 30 June 2014
The scheme commences on:
1 July 2013
Relevant facts and circumstances
B died.
At the time of death, B's assets included 2 properties (the Property).
Probate of B's Will (the Will) was granted.
B's Will gave C an interest in the Property
The Trustee for the estate of B (the Trustee) wanted to sell the Property
The Trustee paid C an amount of money to relinquish their interest in the Property.
Relevant legislative provisions
Income Tax Assessment Act 1997, Section 110-25
Reasons for decision
Section 110-25 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the cost base of a capital gains tax (CGT) asset consists of the following 5 elements:
• The money paid (or required to be paid), or the market value of property given (or required to be given), in respect of acquiring the asset (First element; subsection 110-25(2)).
• Incidental costs incurred to acquire the asset or that relate to a CGT event that happens in relation to the asset (Second element; subsection 110-25(3), and section 110-35 of the ITAA 1997).
• The costs incurred in owning the asset, including interest on money borrowed to acquire the asset, and costs of repairs and maintenance (Third element; subsection 110-25(4)).
• Capital expenditure incurred to increase or preserve the value of the CGT asset (Fourth element; subsection 110-25(5)).
• Capital expenditure incurred to establish, preserve or defend title to the asset (Fifth element; subsection 110-25(6)).
Based on the facts and circumstances, whether the Trustees payment to C will form part of the cost base for the Property will require consideration of the fourth element of cost base.
Subsection 110-25(5) of the ITAA 1997 states that the fourth element of cost base is:
… capital expenditure you incurred:
(a) the purpose or the expected effect of which is to increase or preserve the asset's value; or
(b) that relates to installing or moving the asset…
ATO Interpretive decision ATO ID 2004/425 Income Tax Capital gains tax: deceased estate - cost base of CGT asset - fourth element (ATO ID 2004/425) provides that costs incurred by the trustee of a deceased estate to resolve a dispute with a person claiming an interest in an asset of the estate can come within the fourth element of cost base. In ATO ID 2004/425 a person claimed a life interest in the property of a relative (they had lived in the property with the relative for 10 years prior to the death of the relative), and the trustee of the estate entered into a settlement agreement with the person to have them relinquish their claim; the trustee paid the person a substantial sum to surrender their claim. The settlement payment was considered to be a fourth element amount for the following reasons:
The payment made by the trustees was incurred to remove an impediment to the sale of the property. The person's claim of a life interest was an issue which needed to be resolved before probate could be granted, allowing the sale of the property to proceed.
The requirements of the fourth element of the CGT cost base are satisfied (subsection 110-25(5) of the ITAA 1997). As such, the costs incurred by the trustees to settle the dispute, including the legal fees paid in respect of the dispute, form part of the cost base of the estate's asset under subsection 110-25(5) of the ITAA 1997.
The amount paid by the Trustee to C and the payment by the Trustee in ATO ID 2004/425, have the same purpose; to remove an impediment to the sale of part of the property of the estate (an interest in the property to be sold).
Although there are factual differences between the circumstances in ATO ID 2004/428 and your circumstances, the Commissioner's view in ATO ID 2004/425 is considered to apply to your circumstances.
As such, the expenditure incurred by the Trustee in removing the interest of C in the Property will form part of the cost base for the Property.