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Edited version of your written advice
Authorisation Number: 1051203146302
Date of advice: 29 March 2017
Ruling
Subject: Capital gains tax
Question 1
Do the legal fees and settlement costs form part of the deceased's cost base of the property?
Answer
Yes.
Question 2
Do the legal fees and settlement costs need to be apportioned across the deceased's interests in the land?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2016
The scheme commences on:
1 July 2015
Relevant facts and circumstances
The deceased purchased a property in equal shares with other parties.
One of the other parties died and the deceased inherited their share.
The deceased also acquired another parties share in the property.
The deceased signed a contract for the sale of the land however one of the other remaining parties objected and the contract was not completed.
The purchaser took action for damages/breach of contract.
The deceased paid legal fees and a settlement for breach of contract.
The deceased's estate has disposed of the property.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 102-20
Income Tax Assessment Act 1997 Section 110-25
Income Tax Assessment Act 1997 Subsection 128-15(2)
Reasons for decision
Any capital gain arising from the disposal of a capital gains tax (CGT) asset is calculated using the cost base of that asset.
The cost base of a CGT asset consists of five elements:
● 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 or which relate to a CT event that happens in relation to the asset
● the third element is cost of ownership, including both capital and non-capital costs
● the fourth element is capital costs associated with increasing or preserving the value of the asset, or installing or moving the asset, and
● 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 this case it is accepted that the settlement payment was incurred to defend the deceased's title to the property. Accordingly this payment will form part of the fifth element of the deceased's cost base in respect of the property.
The effect of death on CGT is outlined in division 128 of the Income Tax Assessment Act 1997 (ITAA 1997). Subsection 128-15(2) of the ITAA 1997 states that for the CGT asset of a deceased person, a beneficiary is taken to have acquired the asset on the day the deceased died.
There are special rules relating to the first element of cost base of CGT assets acquired from a deceased person; these are outlined in subsection 128-15(4) of the ITAA 1997. For an asset that the deceased acquired prior to 20 September 1985 (pre-CGT assets) the first element of the asset's cost base is the market value on the date the deceased died. For an asset the deceased acquired on or after 20 September 1985 (post-CGT assets), the first element of the asset's cost base is the cost base of the asset on the day the deceased died.
Taxation Determination TD 2000/31 discusses the capital gains treatment of interests in CGT assets that were acquired at different times. TD 2000/31 provides that the interests remain separate CGT assets for capital gains tax purposes and that when a CGT event such as CGT event A1 (about the disposal of CGT assets) occurs, the following applies;
(a) there is a separate date of acquisition for each interest;
(b) there is a separate cost base for each interest; and
(c) capital proceeds are determined separately for each interest.
In this case, the deceased acquired their original portion of the land prior to 1985. Therefore, that portion was pre-CGT. The deceased subsequently inherited another portion following the death of one of the other owners. As this date is after 1985, the first element of the deceased's cost base will be the market value on the date of their death. Additionally, the deceased acquired a further portion of the land. Consequently the deceased held three separate interests in the land and will have three cost bases. The legal and settlement fees should be apportioned between each cost base for the property on a reasonable basis.