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Edited version of private advice
Authorisation Number: 1051877980516
Date of advice: 14 September 2021
Ruling
Subject: Capital gains tax
Question
Can the payment made to the deceased's spouse to surrender their life interest be included in the fifth element of the cost base of the property?
Answer
Yes. Section 110-25 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that there are five elements of the cost base. Subsection 110-25(6) deals specifically with the fifth element of the cost base. It provides that 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.
The money paid to the deceased's spouse upon surrender of their life interest can form part of the cost base of the property as it was given to establish title to the asset.
This ruling applies for the following period:
Year ended 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
The deceased passed away in 20XX.
The deceased gave their spouse life interest of a property that they owned in their personal name.
The spouse made claim on the net income earned on this property and paid for all expenses incurred on the property.
The deceased's spouse made all decisions on the property as it was their right to do so as per the details set out in the deceased's will.
The spouse of the deceased decided to surrender their life interest in the property, passing the rights of the property to the trustee of the testamentary trust.
The trustee paid the spouse for their remaining amount of life interest in the property.
The money came from a bank account in the name of the deceased.
The testamentary trust was then created upon the life interest forgoing their interest of the property in question.
Since the surrender of the life interest in the property, the trustee received the income earned on the property, paid all of the related expenses and made any decisions needed in relation to the property on the trusts behalf.
The trustee has since signed a contract to sell the property.
The trust will be vested once the asset is sold and the tax liabilities have been paid.
The deceased estate will be fully administered once the final tax return for the estate has been lodged and all tax liabilities have been paid.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 110-25
Income Tax Assessment Act 1997 section 110-25(6)