Edited version of your written advice

Authorisation Number: 1012964617170

Date of advice: 2 March 2016

Ruling

Subject: Capital gains tax

Question 1

Is the sale of the assets in the first company considered by the Australian Taxation Office (ATO) to be "in connection with" the retirement of a director for the purposes of Subdivision 152 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will the Commissioner extend the time limit under paragraph 152-125(1)(b) of the ITAA 1997 for the first company to make one or more payments in relation to the exempt amount?

Answer

Yes

Question 3

Do legal fees incurred in the 20YY and 20ZZ financial years in relation to the Asset Purchase Agreement reduce the capital gain generated in the 20XX year?

Answer

No

This ruling applies for the following periods

Year ended 30 June 20XX

Year ended 30 June 20YY

Year ended 30 June 20ZZ

The scheme commenced on

1 July 20VV

Relevant facts

Over 20 years ago, a director and their spouse registered a company, (the first company) the shareholding of which is 1 ordinary share to each of the director and their spouse.

In 20XX, a second company, the first company and the director entered into a Binding Heads of Agreement (BHA) with another company and its associated entities, to sell certain assets pertaining to electronic engine management systems for underground diesel engines.

The assets included in the agreement to be sold by the second company included inventory, componentry and plant and equipment.

The assets included in the agreement to be sold by the first company included intellectual property (design and goodwill).

There is no allocation of sale proceeds in the Asset Purchase Agreement (APA) or BHA. The first and second companies have agreed between themselves that a reasonable valuation of the intellectual property would be the residual amount left after deducting the valuation of the componentry, stock, tools and equipment from the purchase price. The intellectual property was created by the first company and there is no cost base attributable to it.

The parties of the APA and BHA are as follows:

The sellers are the first and second companies, and the director

The purchasers are 3 unrelated companies.

The recitals of the APA state:

The Sellers are the legal and beneficial owners of the Assets other than the Patents and Patent Applications.

The first company and one of the purchasing companies are the joint legal and beneficial owners of the Patents and Patent Applications.

The Sellers agree to sell and the Buyers agree to buy the Assets for the Purchase Price on the terms and conditions of this agreement.

Each of the Buyers is a subsidiary of the Guarantor and the Guarantor has agreed to guarantee the obligations of the Buyers under this agreement.

The director and shareholder of each of the Sellers and has agreed to give the Sellers' Warranties and to enter into non-compete covenants with the Buyers on the terms set out in this agreement (in addition to the Sellers).

The Guarantor acquired equipment from the second purchasing company in 20XX.

The recitals of the BHA state:

A. The Sellers have agreed to sell the Assets to the particular Buyer specified in this document for the consideration and on the terms and conditions set out in this document.

B. The director and shareholder of each Seller and (among other things) have agreed to give the Sellers' Warranties (in addition to the Sellers).

C. Each of the Buyers is a subsidiary of the first purchasing company which has agreed to guarantee the obligations of the Buyers under this document.

D. The first purchasing company acquired equipment from the second purchasing company in 20XX.

E. The parties have agreed to enter into this document to set out the agreed key commercial terms in relation to the Transaction.

F. The parties intend to enter into the Final Agreement to give effect to the Transaction except to the extent it relates to the sale and purchase of the Initial Inventory.

G. Despite the intention of the parties to enter into the Final Agreement, the agreement evidenced by this document is intended by the parties to be binding upon them.

The APA and BHA both advise the amount of the purchase price of the assets, with payment by the buyers of $a (Completion Payment) at Completion being the sale and purchase of the assets in accordance with the APA, and $b by 12 consecutive monthly instalments commencing on the date which is one month after the date of Completion.

The actual payments received are a deposit on signing, balance of deposit and a number of monthly instalments ceasing in early 20YY.

Under the APA there were more than 10 instalments of which only some have been paid. The outstanding amount is the subject of litigation.

Assets is defined in the BHA to mean

(a) the Intellectual Property Rights;

(b) the Inventory; and

(c) the Tools and Equipment.

Intellectual Property Rights is defined to mean all intellectual and industrial property rights and interests throughout the world, whether registered or unregistered, including trademarks, designs, patents, inventions, circuit layouts, software source code, data encryption, algorithms, copyright and analogous rights,

The net assets of the first company and its associated entities are less than $6 million.

The first company's turnover is more than $2 million in the current and two previous years.

The director was more than 55 years old at the time of entering into the BHA. They worked more than 70 hours per week for the first and second company in 20VV. They reduced their working hours by ceasing work for the first company, and working more than 38 hours per week solely for the second company in 20XX.

Assumptions

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 104-10(4)

Income Tax Assessment Act 1997 Subsection 108-5(1)(a)

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

Income Tax Assessment Act 1997 Subsection 152-10(1)

Income Tax Assessment Act 1997 Section 152-15

Income Tax Assessment Act 1997 Subsection 152-20(1)

Income Tax Assessment Act 1997 Subsection 152-35(1)

Income Tax Assessment Act 1997 Subsection 152-35(2)

Income Tax Assessment Act 1997 Section 152-55

Income Tax Assessment Act 1997 Section 152-60

Income Tax Assessment Act 1997 Section 152-65

Income Tax Assessment Act 1997 Section 152-70

Income Tax Assessment Act 1997 Subsection 152-110(1)

Income Tax Assessment Act 1997 Subsection 152-125(1)

Income Tax Assessment Act 1997 Subsection 152-125(2)

Income Tax Assessment Act 1997 Subsection 152-125(3)

Income Tax Assessment Act 1997 Subsection 152-125(4)

Income Tax Assessment Act 1997 Section 152-330

Income Tax Assessment Act 1997 Subsection 328-110(1)

Income Tax Assessment Act 1997 Subsection 328-110(3)

Income Tax Assessment Act 1997 Subsection 328-110(4)

Income Tax Assessment Act 1997 Subsection 328-115(1)

Income Tax Assessment Act 1997 Subsection 328-115(2)

Income Tax Assessment Act 1997 Subsection 328-115(3)

Income Tax Assessment Act 1997 Subsection 328-125(1)

Income Tax Assessment Act 1997 Subsection 328-125(2)

Income Tax Assessment Act 1997 Subsection 328-130(1)

Income Tax Assessment Act 1997 Subsection 328-130(2)

Reasons for decision

Question 1

Is the sale of the assets in the first company considered by the Australian Taxation Office (ATO) to be "in connection with" the retirement of a director for the purposes of Subdivision 152 of the Income Tax Assessment Act 1997 (ITAA 1997)?

According to subsection 152-110(1) of the ITAA 1997:

An entity that is a company or trust can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied:

(a) the basic conditions in Subdivision 152-A are satisfied for the gain;

(b) the entity continuously owned the CGT asset for the 15-year ending just before the CGT event;

Note: Section 152-115 allows for continuation of the period if there is an involuntary disposal of the asset.

(c) the entity had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which you owned the CGT asset;

(d) an individual who was a significant individual of the company or trust just before the CGT event either:

(i) was 55 or over at that time and the event happened in connection with the individual's retirement; or

(ii) was permanently incapacitated at that time.

The basic conditions in Subdivision 152-A of the ITAA 1997

The basic conditions for relief from capital gains tax (CGT) for small businesses are stated in subsection 152-10(1) of the ITAA 1997:

A capital gain (except a capital gain from CGT event K7) you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain:

(a) a CGT event happens in relation to a CGT asset of yours in an income year:

Note: This condition does not apply in the case of CGT event D1; see section 152-12.

(b) the event would (apart from this Division) have resulted in the gain;

(c) at least one of the following applies:

(i) you are a small business entity for the income year;

(ii) you satisfy the maximum net asset value test (see section 152-15);

(iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership;

(iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year;

Note: For determining whether an entity is a small business entity, see Subdivision 328-C (as affected by sections 152-48 and 152-78).

(d) the CGT asset satisfies the active asset test (see section 152-35).

Note: This condition does not apply in the case of CGT event D1: see section 152-12.

The intellectual property (design and goodwill) of the first company, and certain assets pertaining to specific management systems for diesel engines are CGT assets under paragraph 108-5(1)(a) of the ITAA 1997. CGT event A1 under section 104-10 happens when the CGT assets are sold. There is a capital gain from the CGT event under subsection 104-10(4) as there is a nil cost base as the intellectual property was created by the first company.

To qualify as a small business, an entity needs to satisfy the conditions of section 328-110 of the ITAA 1997 as follows:

328-110(1) You are a small business entity for an income year (the current year) if:

(a) you carry on a business in the current year; and

(b) one or both of the following applies:

(i) you carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than $2 million;

(ii) your aggregated turnover for the current year is likely to be less than $2 million.

328-110(3) However, you are not a small business entity for an income year (the current year) because of subparagraph (1)(b)(ii) if:

(a) you carried on a business in each of the 2 income years before the current year; and

(b) your aggregated turnover for each of those income years was $2 million or more.

328-110(4) You are also a small business entity for an income year (the current year) if:

(a) you carry on a business in the current year; and

(b) your aggregated turnover for the current year, worked out as at the end of that year, is less than $2 million.

The meaning of aggregated turnover is discussed in section 328-115 of the ITAA 1997:

328-115(1) Your aggregated turnover for an income year is the sum of the relevant annual turnover (see subsection (2)) excluding any amounts covered by subsection (3).

Note: For small business CGT relief purposes, additional entities may be treated as being connected with you or your affiliate under sections 152-48 and 152-78.

328-115(2) The relevant annual turnovers are:

(a) your annual turnover for the income year; and

(b) the annual turnover for the income year of any entity ( a relevant entity) that is connected with you at any time during the income year; and

(c) the annual turnover for the income year of any entity (a relevant entity) that is an affiliate of yours at any time during the income year.

328-115(3) Your aggregated turnover for an income year does not include the following amounts:

(a) amounts derived in the income year by you or a relevant entity from dealings between you and the relevant entity while the relevant entity is connected with you or is your affiliate;

(b) amounts derived in the income year by a relevant entity from dealings between the relevant entity and another relevant entity while each relevant entity is connected with you or is your affiliate;

(c) amounts derived in the income year by a relevant entity while the relevant entity is not connected with you and is not your affiliate.

Application to your circumstances

Is the first company a small business?

The CGT event occurred in 20XX, the date of the Binding Heads of Agreement. The year ended 30 June 20XX is therefore the current year. The two income years before the current year are the years ended 30 June 20WW and 20VV. The annual turnover for the first company for each of the years ended 30 June 20WW, 20VV and 20XX (the current year, and two previous years) was over $2 million.

The first company is not a small business in accordance with subsections 328-110(1), (3) and (4) of the ITAA 1997.

Does the first company satisfy the maximum net asset value test?

The maximum net asset value test is stated in section 152-15 of the ITAA 1997:

You satisfy the maximum net asset value test if, just before the CGT event, the sum of the following amounts does not exceed $6,000,000:

(a) the net value of the CGT assets of yours;

(b) the net value of the CGT assets of any entities connected with you;

(c) the net value of the CGT assets of any affiliates of yours or entities connected with your affiliates (not counting any assets already counted under paragraph (b)).

The net value of the CGT asset of an entity, according to subsection 152-20(1) of the ITAA 1997 is the amount (whether positive, negative or nil) obtained by subtracting from the sum of the market values of those assets the sum of:

(a) the liabilities of the entity that are related to the asset; and

(b) the following provisions made by the entity:

(i) provisions for annual leave;

(ii) provisions for long service leave;

(iii) provisions for unearned leave;

(iv) provisions for tax liabilities.

In working out the net value of the CGT assets of an entity, certain assets are disregarded (subsection 152-20(2) of the ITAA 1997), including shares, units or other interests (except debts) in another entity that is connected with the first-mentioned entity or with affiliates of the first-mentioned entity.

The meaning of connected with an entity is stated in section 328-125 of the ITAA 1997:

328-125(1) An entity is connected with another entity if:

(a) either entity controls the other entity in a way described in this section; or

(b) both entities are controlled in a way described in this section by the same third entity.

328-125(2) An entity (the first entity) controls another entity if the first entity, its affiliates, or the first entity together with its affiliates:

(a) except if the other entity is a discretionary trust - own, or have the right to acquire the ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage) that is at least 40% of:

(i) any distribution of income by the other entity; or

(ii) if the other entity is a partnership - the net income of the partnership; or

(iii) any distribution of capital by the other entity; or

(b) if the other entity is a company- own, or have the right to acquire the ownership of equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage (the control percentage) that is at least 40% of the voting power in the company.

The meaning of affiliate is stated in section 328-130 of the ITAA 1997:

328-130(1) An individual or a company is an affiliate of yours if the individual or company acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the individual; or company.

328-130(2) However, an individual or a company is not your affiliate merely because of the nature of the business relationship you and the individual or company share.

Note: For small business relief purposes, a spouse or a child under 18 years may also be an affiliate under section 152-47.

Application to your circumstances

Entities connected with, or affiliates of, the first company are the second company and the director who holds more than 40% of the right to receive income and capital distributions and voting power in the first company. If the net assets of the first company, the second company and the director are less than $6 million just before the CGT event, the maximum asset value test will be satisfied. CGT assets of an individual may include the individual's main residence if that residence is partially used to produce assessable income.

The total net assets of the first company, the second company and the director are less than $6 million just before the CGT event on 27 June 20XX. Therefore, the maximum asset value test has been satisfied.

Was an active asset sold?

The asset must be an active asset as provided for by section 152-35 of the ITAA 1997:

152-35(1) A CGT asset satisfies the active asset test if:

(a) you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the period specified in subsection (2); or

(b) you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7 ½ years during the period specified in subsection (2).

152-35(2) The period:

(a) begins when you acquired the asset; and

(b) ends at the earlier of:

(i) the CGT event; and

(ii) if the relevant business ceased to be carried on in the 12 months before that time or any longer that the Commissioner allows - the cessation of the business.

The meaning of active asset is discussed in section 152-40(1) of the ITAA 1997:

A CGT asset is an active asset at a time if, at that time:

(a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by:

(i) you; or

(ii) your affiliates; or

(iii) another entity that is connected with you; or

(b) if the asset is an intangible asset - you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you.

The time of acquisition of an asset without a CGT event is when an entity creates a CGT asset when work that resulted in the creation started. Work began on the creation and development of the CGT asset at the time of registration. The intellectual property, including goodwill and designs, has therefore been owned by the first company since it was registered over 20 years ago. The CGT event was in 20XX. The asset was used in the course of carrying on a business for more than 7 ½ years, and owned for more than 15 years. The asset sold was therefore an active asset.

Thus, the first company satisfies the basic conditions for small business relief under subsection 152-10(1) of the ITAA summarised as follows:

• CGT event A1 happens in relation to the sale of intellectual property (design and goodwill), and certain assets pertaining to management systems for diesel engines in the 20VV-20XX income year

• the event will result in a capital gain

• the first company satisfies the maximum net asset value test

• the CGT assets satisfies the active asset test.

The continuous ownership of the CGT asset for 15 years ending just before the CGT event

The first company has owned intellectual property (design and goodwill), and certain assets pertaining to management systems for diesel engines since registration over 20 years ago. The shareholding of the company has remained the same since registration. The intellectual property was not acquired from another business; rather it was created by the first company. Therefore the first company satisfies the continuous ownership of intellectual property for 15 years just before the CGT event.

Significant individual for a total of at least 15 years during the period of ownership of the CGT asset

An individual, according to section 152-55 of the ITAA 1997, is a significant individual in a company at a time if, at that time, the individual has a small business participation percentage in the company of at least 20%. Small business participation percentage includes both direct and indirect small business participation percentage (section 152-65 of the ITAA 1997). In the case of a company, the direct small business participation percentage includes the holding of the legal and equitable interests in shares in the company, voting power in the company, dividend and capital distribution (section 152-70 of the ITAA 1997).

With respect to the first company:

• The total issued capital in the first company is 2 ordinary shares;

• The shareholding is 1 ordinary share to the director and 1 ordinary share to the director's spouse;

• In accordance with their shareholding and the constitution of the first company, the director has a right to 50% of the shares in the company that have a voting, dividend and distribution right;

• The shareholding has remained unchanged since incorporation.

As such the director has a small business percentage of at least 20% and was a significant individual of the first company for at least 15 years.

Significant individual 55 years or over just before the CGT event

The CGT event occurred in 20XX. The director was born before 1959. The director, a significant individual, was therefore over 55 years old at the time of the CGT event.

The event happened in connection with the significant individual's retirement or the significant individual was permanently incapacitated at that time of the CGT event

The director has reduced their hours of work after the sale of the CGT asset. Prior to the sale, the director had been managing director of the first company for over 20 years which had been designing and producing an specific management system. In 20UU the second company was established when it was decided that the product should be prepared to allow for it to be sold to allow the director to wind back and "retire".

The change is hours worked, duties and company worked is summarised below:

Guidance in relation to the retirement condition of small business CGT concessions is provided by the Advanced guide to capital gains tax concessions for small business 20VV-20XX NAT 3359-06.2014.

Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. There would need to be at a significant reduction in the number of hours the individual works or a significant change in the nature of their present activities to be regarded as a retirement. However, it is not necessary for there to be a permanent and everlasting retirement from the workforce.

The director has reduced their working hours from more than 70 hours per week to more than 38 hours per week. He/she has changed her/his duties, and the company output has changed. Although there is not a permanent retirement from the workforce, it is accepted that there has been a significant reduction in the number of hours worked by the individual. The CGT event has therefore occurred in connection with the significant individual's retirement.

Small Business 15 year exemption for the first company

The APA allows for a purchase price being $a on completion and $b in 12 monthly instalments for the sale of intellectual property (design and goodwill), and certain assets pertaining to management systems for diesel engines.

If the sale proceeds as planned and if the first company receives a share of the purchase price as capital proceeds for the CGT assets, it will have a capital gain considering that there is no cost base for the intellectual property. Since the first company satisfies all the conditions of the 15-year exemption under section 152-110 of the ITAA 1997, it will be able to disregard the capital gain from the sale. The capital gain will be an exempt amount for the first company.

Question 2

Will the Commissioner extend the time limit under paragraph 152-125(1)(b) of the ITAA 1997 for the first company to make one or more payments in relation to the exempt amount?

The first company satisfies the Small Business 15 year exemption and can disregard the capital gain. The 15-year rule has priority over other provisions as stated in section 152-330 of the ITAA 1997:

This Subdivision does not apply to a capital gain to which Subdivision 152-B (15-year exemption) applies.

The capital gain exemption is subject to the capital gain actually being received within time limits set out in subsections 152-125(1) and (4) of the ITAA 1997:

152-125(1) This section applies if:

(a) one or more of the following apply:

(i) under section 152-110, a capital gain (the exempt amount) of a company or trust is disregarded;

(ii) under section 152-110, an amount of income (the exempt amount) is non-assessable non-exempt income of a company or trust;

(iii) subparagraph (i) of this paragraph would have applied to an amount (the exempt amount) except that the capital gain was disregarded anyway because the relevant CGT asset was acquired before 20 September 1985;

(iv) subparagraph (i) of this paragraph would have applied to an amount (the exempt amount) if subsection 149-30(1A) and section 149-35 had not applied to the relevant asset; and

(b) the company or trust make one or more payments (whether directly or indirectly through one or more interposed entities) in relation to the exempt amount within 2 years after the relevant CGT event to an individual who was a CGT concession stakeholder of the company or trust just before the event.

152-125(2) In determining the taxable income of the company, the trust, the individual, or any of the interposed entities, disregard the total amount of the payment or payments made to the CGT concession stakeholder, up to the following limit:

Stakeholder's participation

percentage x Exempt amount

where:

stakeholder's participation percentage means:

(a) in the case of a company or a trust referred to in item 2 of the table in subsection 152-70(1) - the stakeholder's small business participation percentage in the company or trust just before the relevant CGT event; or

(b) …

152-125(3) If a company makes such a payment, this Act applies to the payment, to the extent that it is less than or equal to the limit mentioned in subsection (2), as if:

(a) it were not a dividend; and

(b) it were not a frankable distribution.

152-125(4) The Commissioner may extend the time limit under paragraph (1)(b).

The capital gain of the first company is disregarded under section 152-110 of the ITAA 1997. The first company has 2 years after the CGT event to make one or more payments to an individual who was a CGT concession stakeholder of the first company just before the event.

A CGT concession stakeholder is defined in section 152-60 of the ITAA 1997:

An individual is a CGT concession stakeholder of a company or trust at a time if the individual is:

(a) a significant individual in the company or trust; or

(b) a spouse of a significant individual in the company or trust, if the spouse has a small business participation percentage in the company or trust at that time that is greater than zero.

As stated above, the director is a significant individual of the first company. The director's spouse is also a CGT concession stakeholder as she/he is a significant individual as she/he has a small business participation percentage of at least 20%, namely 50%, and is the spouse of a significant individual who has a small business participation percentage greater than zero.

The CGT event occurred in 20XX. The 2 year limit expires in 20ZZ. Alternatively, the time limit may be extended under subsection 152-125(4) of the ITAA 1997.

The purchase price of the CGT assets is $a on completion and $b over 12 monthly instalments. To date, five instalments have been paid, the last being in early 20YY, with the amount outstanding being the subject of litigation.

Payment of the capital proceeds in instalments may make distribution of the exempt amount within 2 years difficult. For the capital gain to be disregarded, the first company needs to make one or more payments to the director in 20ZZ. This condition will be satisfied if one or more instalments are distributed in specie.

The director and her/his spouse are CGT concession stakeholders with a stakeholder's participation percentage of 50% each. In accordance with subsection 152-125(2) of the ITAA 1997, if 50% of the exempt amount is paid to each of the director and his/her spouse, those amounts will be disregarded from determining the taxable income of the individuals.

In accordance with subsection 152-125(3) of the ITAA 1997, payments made by the first company to each of the director and his/her spouse less than or equal to the disregarded amounts will not be a dividend or a frankable distribution. The payments will be exempt to both the director and her/his spouse.

An extension of time beyond 2 years could be allowed in circumstances which

(a) there has been an unexpected delay in the company or the trust receiving the capital proceeds; or

(b) there has been an unexpected need for the company or the trust to use part or all of the capital proceeds.

In the situation of the first company, there has been an unexpected delay in receiving part the proceeds and litigation has been taken to recover the outstanding amount. It is appropriate to extend the time limit if all capital proceeds have not been received by 20ZZ. The Commissioner will extend the time limit to 20AA for the distribution of the exempt amount in the event proceeds continue to remain unpaid as at 20ZZ. For amounts of proceeds that have already been received, the first company has until 20ZZ to use the proceeds as a distribution of exempt amounts to the director and his/her spouse in accordance with the calculation in subsection 152-125(2) of the ITAA 1997.

Question 3

Do legal fees incurred in the 20YY and 20ZZ financial years in relation to the Asset Purchase Agreement reduce the capital gain generated in the 20XX financial year?

The capital gain was generated in 20XX, in the 20XX financial year. The capital proceeds were paid in instalments until early 20YY. Legal fees have been incurred in the 20YY and 20ZZ financial years to recover the outstanding amount owing.

A capital gain can be reduced by the cost base which has five elements. Incurring legal fees appears to be closest to the fifth element in subsection 110-25(6) of the ITAA 1997:

The fifth element is capital expenditure that you incurred to establish, preserve or defend your title to the asset, or a right over the asset.

Legal fees are not incurred to establish, preserve or defend your title to the CGT assets. Rather they are being incurred to obtain outstanding amounts owing on the sale of the CGT assets. As legal fees are not included in the fifth element of the cost base, or any other element, legal fees incurred in the 20YY and 20ZZ financial years cannot reduce the capital gain generated in the 20XX financial year.