Edited version of private advice

Authorisation Number: 1052188242324

Date of advice: 03 November 2023

Ruling

Subject: CGT - cost base

Question

Will the Payment be included in the fourth element of the cost base of Lot X?

Answer

Yes.

Subsection 110-25(5) of the Income Tax Assessment Act 1997 (ITAA 1997) relates to the fourth element of a cost base and includes capital expenditure you incurred to increase or preserve the asset's value.

In accordance with the principles contained inATO ID 2004/425 Do costs incurred by the trustee of a deceased estate to resolve a dispute with a person claiming an interest in an asset of the estate, form part of the cost base of the asset under subsection 110-25(5) of the Income Tax Assessment Act 1997 (ITAA 1997)?the Payment you will make to Person A is to remove the impediment for you to be able to sell the proposed Lot X, being their rights in it.

Therefore, it is viewed that the Payment should be included in the fourth element of the cost base of Lot X as it meets the conditions to be eligible to be included in that element of Lot X's cost base.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You and your spouse purchased the property (the Property) as joint tenants after 20 September 1985.

The Property has a land area of less than two hectares. It had several residential dwellings located on it with the remaining area being vacant land.

A Statutory Declaration was made several years ago by you and your spouse in which you both declared as the landowners of the Property that you had given your adult child (Person A) permission to construct a dwelling on the Property.

Shortly after this, you and your spouse also signed a statement of your wishes as the owners of the Property summarised as follows:

•         Person A is with your permission building a residence on that portion of the Property referred to as Lot X

•         Upon your deaths it is your intent by your Wills to leave all of your assets to Person A and your other child (Person B), equally, but acknowledge that by allowing Person A to build on Lot X there is a discrepancy. Accordingly, it is your express wish and desire that Person A and Person B subdivide the Property to allow Person B to receive an equivalent area to Lot X from the balance of the Property for their use and benefit, with Person A retaining Lot X for their own use and benefit with the costs of the subdivision to be borne by the estate of the survivor of either you or your spouse

•         Once Person A has received Lot X and Person B has received a lot of equivalent area from the Property the balance of the Property to be retained or sold for the benefit of both Person A and Person B equally

•         It was not intended that the Statement of Wishes have effect as a testamentary disposition but is only a statement of your and your spouse's wishes in relation to the Property.

Person A constructed a new house (the House) on the area of the Property referred to as Lot X, which they moved into after construction was completed and has continued to live in since then.

Your spouse passed away and you acquired their ownership interest in the Property as the surviving joint tenant.

You are considering selling the proposed Lot X with the following activities to occur to enable it to be sold:

•         The Property will be subdivided into several lots, creating Lot X, with you keeping the ownership of all lots

•         Person A will agree to surrender their rights in Lot X, with you agreeing to pay them the market value of the land and Home related to Lot X (the Payment) as consideration for the surrender of their right; and

•         You will sell Lot X to an unrelated party.

You will sell Lot X once the above activities have occurred.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 110-25