Edited version of private advice

Authorisation Number: 1052265497816

Date of advice: 5 August 2024

Ruling

Subject: Legal fees

Question

Can you claim the legal fees and the loan payout amount of $XXXX as part of the cost base of property X (the property) in accordance with section 110-25 of the ITAA 1997?

Answer

No

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

Relevant facts and circumstances

You purchased the property in XX 20XX for approximately $X. X bank financed the home loan for $X and you paid the balance.

In 20XX, two individuals expressed an interest in loaning you funds to enable the property to be developed for sale.

In 20XX, these two individuals loaned you $X to develop the property.

They also provided another $X loan to enable your involvement with the purchase and development of other property. You signed as guarantor of the loan.

In 20XX, the two individuals were no longer interested in you developing the property and pressured you to sell the property.

The property was sold in X 20XX and settled in X 20XX for approximately $X.

You had a dispute with the two individuals about how the sale proceeds from the property needed to be distributed under the various loan agreements. The legal fees related to this dispute and other legal matters.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 110-25

Reasons for decision

Summary

The legal fees cannot be claimed as part of the cost base.

Detailed reasoning

The cost base of a CGT asset is generally the cost of the asset when you bought it, plus certain other costs associated with acquiring, holding and disposing of the asset.

Section 110-25 of the ITAA 1997 contains the five elements of the cost base. In order for a cost to be incorporated into the cost base of the property, it must be included in one of these five elements of the cost base.

First element

The first element of the cost base is the total of the money paid, or required to be paid, and the market value of property given, or required to be given, in respect of the acquisition of the asset (subsection 110-25(2) of the ITAA 1997).

Second element

The second element of the cost base are the incidental costs of acquiring the asset or costs that are incurred in relation to selling or disposing of the asset (section 110-25 of the ITAA 1997). These costs include:

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

•             costs of transfer

•             stamp duty or other similar duty

•             costs of advertising or marketing (but not entertainment) to find a seller or buyer

•             costs relating to the making of any valuation or apportionment to determine your capital gain or capital loss

•             search fees relating to an asset

•             the cost of a conveyancing kit

•             borrowing costs

•             expenditure that is incurred as a direct result of your ownership of a CGT asset ending.

Third element

The third element of the cost base are the costs of owning the asset (subsection 110-25(4) of the ITAA 1997).

These costs can include interest on money borrowed to acquire the asset, costs of maintaining, repairing or insuring the asset, rates or land tax, interest on money you borrowed to refinance to acquire the asset and interest on money you borrowed to finance the capital expenditure you incurred to increase the assets value.

Fourth element

The fourth element of the cost base is capital expenditure incurred to increase or preserve the asset's value and which is reflected in the state or nature of the asset at the time of the CGT event (subsection 110-25(5) of the ITAA 1997).

Fifth element

The fifth element of the cost base is capital expenditure incurred to establish, preserve or defend your title to the asset, or a right over the asset (subsection 110-25(6) of the ITAA 1997).

Application to your circumstances

In your case, the legal costs incurred were in respect of a dispute about guarantees, liabilities under loan contracts, general advice and strategy in relation to contemplated litigation, deed of release, phone calls, meetings and default notices related to several property development arrangements.

The legal costs are patently not included in the first, third or fifth elements of the cost base of the property. They are also not included in the second or fifth elements of the cost base of the property. The legal costs were not incurred in relation to your sale of the property but, rather, related to a dispute about the operation of various loan agreements, which then had spill-over to the destination of the proceeds from the sale of the property. Furthermore, the legal costs were incurred after you sold the property and so could not have been incurred to establish, preserve or defend your title to the property.

The legal costs and the loan payout amount of XXX do not fall within any of the five elements of the cost base and, therefore, cannot be incorporated into the cost base.