Edited version of your written advice

Authorisation Number: 1051435462953

Date of advice: 17 October 2018

Ruling

Subject: Income tax – capital gains tax- deceased estates

Question 1

Are the dividends you received for the shares in the share portfolio assessable to you in the 20XX-XX year?

Answer

Yes

Question 2

Can you claim a deduction for the legal expenses that were incurred in defending an action against the will of the deceased?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Your spouse passed away in the 20XX-XX year (the deceased).

The Estate for the deceased (The Estate) was created in order to report income being earned by the estate until all the shares/assets had been transferred to you and bank accounts closed.

As directed by the deceased’s will, ownership of the shares/assets were transferred to you during that same year.

You owned a number of shares, described as the share portfolio.

You lodged your income tax return for the 20XX-XX, reporting the dividends you received from the shares you owned, including those from the shares that you inherited from the deceased.

The deceased’s will was contested and you went through mediation.

Settlement was reached and judgment/orders were issued that directed that the Plaintiff (‘Plaintiff A’ and ‘Plaintiff B’), each receive by way of provision out of the notional estate of the deceased, a lump sum payment.

The lump sums were to be paid within 45 days from the date of the orders.

If the payments were not made within 45 days, then interest would accrue and the plaintiff/s could seek an order that the shares in the share portfolio be sold, with the lump sums and interest to be paid to the plaintiffs and any cost subsequently ordered to be paid, of the net proceeds of sale be designated as notional estate of the deceased and to be paid to the plaintiff.

The order also stipulated that you could pay the lump sum and any interest, otherwise than from the property to be designated as notional estate of the deceased.

You sold shares from the XYZ share portfolio within 45 days from the date of the order.

You made a payment of $X to your solicitor’s trust account. This payment was made up of $X1 that you received from the sale of the shares in the share portfolio together with $X2 taken from a savings account.

A few days later $Y was transferred from your solicitor’s trust account to the trust account of the solicitor for Plaintiff A for payment to Plaintiff A, and $Z was transferred to the trust account of the solicitor for Plaintiff B for payment to Plaintiff B.

The court order directed that your costs be paid, or retained, as the case may be, out of the estate of the deceased.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 6-5(2)

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1936 subsection 44(1)

Reasons for decision

Dividend income

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Dividends paid by a company to a shareholder are included in the shareholder’s assessable income under section 44(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

As the legal owner of the shares in the 2016-17 year, the dividends paid to you are assessable to you, unless you were holding them on trust for someone else. We do not believe that to be the case.

The court ordered that you pay a lump sum to the plaintiffs within 45 days. If that didn’t happen, the plaintiffs could seek an order that the Bell Potter share portfolio be sold to make the payments.

The court order did not change the ownership of the shares, and therefore who received the dividend income in the 2016-17 year. It effectively created a lien over the shares from the date of the order, until the lump sums were paid to the plaintiffs as directed.

At the time you lodged your 20XX-XX income tax return, you were the legal owner of the shares, and as such the dividends from those shares were assessable to you.

Deduction for legal expenses

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for any loss or outgoing to the extent that it is incurred in gaining or producing assessable income. However, a loss or outgoing is not deductible if it is:

● capital or of a capital nature,

● of a private or domestic nature, or

● incurred in relation to gaining or producing exempt income or non-assessable non-exempt income.

If you do not incur an expense, then you cannot claim a deduction for it. To claim a deduction you must have spent the money yourself. You cannot claim a deduction for an expense to the extent that someone else paid the expense, or you were, or will be, reimbursed for the expense.

In your case, the legal fees that were incurred in defending the action against the deceased’s will were to be paid from the deceased’s estate. As such, you did not incur the expense, and cannot claim a deduction for it.

Further information to consider

In determining whether a deduction for legal expenses is allowable, the nature or character of the expenditure must be considered, that is, whether the legal expenses are incurred for a capital or a revenue purpose (Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 3 AITR 436; (1946) 8 ATD 190).

The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses. If the advantage to be gained is of a capital nature, then the expenses incurred in gaining the advantage will also be of a capital nature.

In your case, legal expenses were incurred in defending an action against the will of the deceased.

As such, the legal expenses are of a capital nature and are not deductible under section 8-1 of the ITAA 1997.