Edited version of private advice

Authorisation Number: 1052409993564

Date of advice: 18 June 2025

Ruling

Subject: CGT - cost base

Question 1

Does the settlement sum amount incurred by you under the Settlement Deed form part of the cost base of the Property under subsection 110-25 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes. The amount paid will form part of the fourth element of the cost base of the Property.

Question 2

Do the legal costs incurred by you in resolving the dispute over the Property form part of the cost base of the property under subsection 110-25 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 2

Yes. The costs incurred and paid will form part of the fourth element of the cost base of the Property.

This ruling applies for the following periods:

Year ended XX XXX 20XX

Year ended XX XXX 20XX

Year ended XX XXX 20XX

Year ending XX XXX 20XX

The scheme commenced on:

XX XXX 20XX.

Relevant facts and circumstances

The property is located at Address A (the Property).

Person A and Person B were the proprietors of the Property.

Person C is the child of Person A and Person B.

Person C is married to Person D.

On XX XXX 20XX Person A and Person B transferred the Property to Person C.

Person A and Person B continued to reside at the Property.

On or about XXX 20XX Person C and Person D advised Person A and Person B that they intended to sell the property, and that Person A and Person B would need to vacate the Property.

A dispute then arose as Person A and Person B contended that the Property had been transferred to Person C to hold in trust for them or that at least they held a life interest in the property.

On XX XXX 20XX Person A and Person B lodged a caveat on the title of the Property.

On XX XXX 20XX Person B passed away. The matter was still in dispute at this time.

On XX XXX 20XX Person C signed a contract of sale on the Property for the amount of $X. The caveat was still on the property.

On XX XXX20XX Person A commenced proceedings against Person C and Person D. The proceedings sought relief from them in the form of:

•                a declaration that Person C and Person D held their interest in the Property on constructive trust for Person A, or

•                a declaration that Person A has a life interest in the Property, that Person C and Person D held the property on express trust for Person A, and that Person A was entitled to an equitable lien over the property to an amount equivalent to the value of their life interest, or

•                that Person C pay Person A, a sum of $X, being the outstanding purchase price pursuant to the transfer of the Property on XX XXX 20XX, and that this amount be paid from the sale of the property to Person A, prior to any interest being paid to Person D.

•                payment to Person A for damages, equitable compensation, and costs.

On XX XXX 20XX the two parties entered into a Deed of Settlement and Release.

The Deed of Settlement acknowledged that Person A did have a life interest in the Property and that Person C and Person D agreed to pay Person A the sum of $X for them to relinquish the life interest.

On XX XXX 20XX the sale of the property was finalised with Person A withdrawing the caveat on the property. Person A was paid a sum of $X as part payment of the settlement sum.

The balance of the settlement sum, of $X remains due.

A mortgage was granted to Person A over Person C's and Person D's property and main residence at Address B to secure the balance of the settlement sum.

On XX XXX 20XX court proceedings were discontinued in accordance with the Deed of Settlement.

Person C ad Person D have incurred costs totalling $X in legal and conveyancing fees over the period from XX XXX 20XX to the end of the ruling period of XX XXX 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 110-25

Reasons for decision

Subsection 110-25(5) of the ITAA 1997 details that the fourth element of the cost base of a CGT asset includes capital expenditure incurred to increase or preserve the asset's value.

ATO ID 2004/425 - Capital gains tax: deceased estate - cost base of CGT asset - fourth element, highlights

this position. In a dispute over who held an interest in an asset, it was determined that 'The costs incurred to settle the dispute, including the legal fees paid in respect of the dispute, form part of the cost base of the estate's asset under subsection 110-25(5) of the ITAA 1997.'

Application to your circumstances

In your case, it was disputed whether or not Person A held a life interest in the Property, and whether you held this property in trust for them and Person B (deceased).

As in the case detailed in ATO ID 2004/425, you and your spouse entered into a settlement agreement with Person A to allow the contracted sale of the property to proceed to settlement with the removal of the caveat by Person A.

Part of this settlement agreement was the payment of settlement sum to Person A in acknowledgment of their life interest in the Property. This settlement sum, and the legal costs incurred by you in resolving this dispute, satisfy the requirements of the fourth element of the cost base of a CGT asset as detailed in subsection 110-25(5) of the ITAA 1997.