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Edited version of your written advice
Authorisation Number: 1051339821341
Date of advice: 16 February 2018
Ruling
Subject: Deceased estate and deductions
Question 1
Is the estate able to claim a tax deduction for the costs incurred in “Grant of Probate”?
Answer
No
Question 2
Is the estate able to claim a tax deduction for the legal costs for administration of the estate?
Answer
No
This ruling applies for the following period:
Year ended 30 June 2017
The scheme commences on:
1 July 2016
Relevant facts and circumstances
The deceased died in the 2017 income year.
The investments assets held at the time of their death were transferred to their estate.
The administration costs comprise a mix of appointments and emails with the executors to take instructions for the overall administration, writing to and receiving responses from banks, share registries, investment adviser to ascertain value of assets at date of death, preparing forms for withdrawal or sale of assets, forwarding to executors to sign and then arranging closure or sale of assets with the relevant authorities, receipt of those funds.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1.
Reasons for decision
Grant of Probate
Expenses incurred in gaining or producing assessable income are generally allowable as a deduction pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).
Subsection 8-1(1) of the ITAA 1997 states that:
You can deduct from your assessable income any loss or outgoing to the extent that:
(a) it is incurred in gaining or producing your assessable income; or
(b) it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.
Subsection 8-1(2) of the ITAA 1997 then states that:
However, you cannot deduct a loss or outgoing under this section to the extent that:
(a) it is a loss or outgoing of capital, or of a capital nature; or
(b) it is a loss or outgoing of a private or domestic nature; or
(c) it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or
(d) a provision of this Act prevents you from deducting it.
According to paragraph 2 of Taxation Ruling IT 2622 Income tax: present entitlement during the stages of administration of deceased estate:
“An executor of a deceased person who leaves a will must obtain probate of the will. This is the official proving of the will and provides the executor with authority to deal with the estate.”
As confirmed in ATO ID 2001/729 Income Tax CGT - deceased estate - cost base of CGT assets - legal costs incurred in confirming validity of the will (withdrawn) legal expenses to obtain probate are capital expenses. ATO ID 2001/729 states, in part, that:
“… expenditure incurred in confirming the validity of the deceased's will and obtaining a grant of probate [is] incurred by the executor to preserve the rights over the assets of the estate.
Consequently, it forms part of the cost bases of the estate's assets pursuant to subsection 110-25(6) of the ITAA 1997.”
As the expenses are considered capital in nature, they are not deductible under section 8-1 of the ITAA 1997. While the ATO ID has now been withdrawn, it is still correct at law. This view is confirmed on the ato.gov.au website on the deceased estates and capital gains tax web page.
In your case, the grant of probate costs are not a deductible expense for the estate. They are considered capital in nature.
Ongoing administration fees
In your application, you have stated that:
“In relation to the administration costs, they comprise a mix of appointments and emails with the executors to take instructions for the overall administration, writing to and receiving responses from the banks, share registries, investment adviser to ascertain the value of assets at date of death, preparing forms for withdrawal or sale of assets, forwarding the executors to sign and then arrange closure or sale of the assets with the relevant authorities, receipt of those funds.”
The specific costs you have identified relate to the holding and disposal of the estate assets rather than the production of income from the estate assets. These costs are capital in nature, and thus excluded from being deductible pursuant to section 8-1 of the ITAA 1997.
ATO view documents
ATOID 2001/729