Edited version of private advice

Authorisation Number: 1052056424414

Date of advice: 19 December 2022

Ruling

Subject: Capital gains tax

Question

Will the legal expenses for the Supreme Court proceedings and for the day-to-day legal advice form part of the cost base of the CGT asset pursuant to section 110-25 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. Based on the information provided to the commissioner, the legal fees incurred in relation to the Supreme Court proceedings by the estate in the amount of $X and the legal expenses relating to the day-to-day administration of the estate in the amount of $X will form part of the cost base of the estate.

Subdivision 110-A of ITAA 1997 contains the rules for working out the cost base of a CGT asset.

The cost base of a CGT asset to a taxpayer consists of five elements as set out in section 110-25 of the ITAA 1997.

Subsection 110-25(6) of the ITAA 1997 provides that the fifth element is the capital expenditure incurred by the taxpayer to establish, preserve or defend the taxpayer's title to, or a right over, the asset. The expenditure can include giving property.

In your case, a beneficiary of the deceased estate commenced legal proceedings to remove the executor of the deceased estate. As executor of the deceased estate, the taxpayer incurred expenses in defending their title to or right over the estate's asset. This view is consistent with ATO ID 2001/730 (withdrawn) where it was determined that legal costs, incurred by the executor in defending a claim by a member of the deceased's family to control the estate, do form part of the cost base of the estate's assets pursuant to subsection 110-25(6) of the ITAA 1997.

Subsection 110-25(3) of the ITAA 1997 provides that the second element of the cost base include incidental costs. Subsection 110-35(2) of the ITAA 1997 clarifies that the following costs may be incurred as incidental costs:

•                     Remuneration for the services of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal adviser.

The day-to-day legal fees form part of the cost base under section 110-25(3) of the ITAA 1997 as they are considered incidental costs of the estate.

This ruling applies for the following period:

Year ending 30 June 20YY

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

The Deceased passed away several years ago.

The Property is the only asset of the estate.

The Property was rented out as a XXXX since the date of death.

Over the years, the Executor attended meetings with numerous parties negotiating the sale of the Property.

Supreme Court Legal Proceedings were brought by one of the beneficiaries of the Estate to have the executor removed.

One of the beneficiaries disagreed with the term of the sale of the property.

The action was defended by the executors to preserve the value of the assets of the Estate and to achieve a sale of the property that was in the best interests of the beneficiaries.

The beneficiary was unsuccessful in his action to remove the Executor and the court ordered the Executor to pay costs.

The Property was subsequently sold. Settlement occurred several years after the date of death.

The cost incurred by the Executor in the Supreme Court Legal Proceedings was reimbursed by the Estate.

The estate also incurred legal fees for the day to day running of the estate.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 Subdivision 110-25

Income Tax Assessment Act 1997 Subdivision 110-35