Edited version of private advice

Authorisation Number: 1052281619507

Date of advice: 5 August 2024

Ruling

Subject: CGT - cost base - legal costs

Question 1

Can you include legal fees incurred to defend the assets of the estate in the cost base of the estate's capital gains tax (CGT) assets disposed of in 20XX?

Answer

Yes.

The legal expenses were incurred for a capital purpose, that is the right to preserve or defend the deceased's assets being property and shares (CGT assets), and cash in bank accounts. Therefore, the expenses are considered capital in nature.

Question 2

Should the legal fees, that relate to defending the assets of the estate, be apportioned across the CGT assets of the estate pursuant to subsection 112-30(1A) of ITAA 1997?

Answer

Yes.

If you incur expenditure and only part of it relates to another element of the cost base or reduced cost base of a CGT asset, that element includes that part of the expenditure that is reasonably attributable to that element.

As the executor of the deceased estate holding assets of the estate, legal fees incurred in taking action to defend your right over the assets forms part of the cost base of the CGT assets of the estate.

The legal fees can be added to the cost base of your assets for the purpose of determining any capital gains or losses when the assets are sold.

In your case, as the legal expenses were incurred to first defend and then preserve the assets of the deceased estate, the legal fees will form part of the cost base of the CGT assets of the deceased estate.

You will be required to apportion the legal costs to the cost bases of the CGT assets of the estate, being the property and shares, on a proportionate approach based on the value of the property and shares (when they are disposed of) compared to the total value of the estate assets (including the cash in bank accounts) under subsection 112-30(1A) of ITAA 1997. We note that cash is not a CGT asset and as such, does not have a cost base.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

XX XXX 20XX

Relevant facts and circumstances

Your father (the deceased) passed away on XX XX 20XX.

The deceased had XX children.

You were contacted by a third party and advised of a will, executed by the deceased on XX XX 20XX.

You and other siblings of the deceased took legal action to challenge the will in the Supreme Court against the third party.

You and the other siblings were successful in challenging the will and the Supreme Court granted probate of a will made on XX XX 19XX.

The will dated XX XX 19XX dividing the deceased estate equally amongst the deceased's XX children.

The deceased estate held the following assets:

Property valued $XXX.

Share portfolio valued $XXX.

Cash in bank accounts $XXX.

The verdict for the case was handed down on XX XX 20XX by XX XX.

The order for grant of probate was handed down by XX XX on XX XX 20XX.

Probate was granted to you on XX XX 20XX.

The court ordered that the costs of the plaintiff be paid out of the estate of the deceased.

The plaintiff did not request payment of their legal bills by way of a demand or invoice.

The plaintiff did not take action to claim their legal costs until XX 20XX when they issued a notice of cost assessment sent to you as the executor.

The cost assessment was carried out without the inclusions of you the executor.

The plaintiff did not advise you the executor of the outcome of their cost assessment.

The plaintiff took action in the Supreme Court to proceed to bankrupt you the executor over their unpaid costs.

On XX XX 20XX, The plaintiff issued a bankruptcy notice to you the executor.

You as the executor defended the estate assets from a claim by the creditor.

The plaintiff claim exceeded that provided for by the Supreme Court.

You the executor had to defend the claim, otherwise the estate would have paid an excessive amount to the plaintiff.

You the executor and the plaintiff settled out of court for the sum of $XXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 110-25

Income Tax Assessment Act 1997 section 112-30(1A)