ATO ID 2004/425: Capital gains tax: deceased estate - cost base of CGT asset - fourth element
Date of decision: 29 April 2004
Year of income: Year ended 30 June 2004
Business line: Private Groups and High Wealth Individuals

Issue
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)?

Decision
Yes. 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.

Facts
A person resided in the home of their relative for a period of 10 years before the death of the relative, assisting with the care of the relative and maintaining the property. After the death of the relative, the person claimed that they had acquired a life interest in the deceased's property. The person was not mentioned in the will of the deceased. While the trustees of the estate disputed the person's claim, the trustees entered into a settlement agreement with the person in order that they may dispose of the property as vacant premises. Under the settlement agreement, the trustees paid the person a substantial sum to surrender any claims the person may have had against the estate. The trustees also incurred legal fees during the dispute. The property was later sold, more than two years after the date of death of the deceased.

Reasons for decision
Summary: Subsection 110-25(5) of the 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. The payment made by the trustees was incurred to remove an impediment to the sale of the property. The person's claim of a life interest was an issue which needed to be resolved before probate could be granted, allowing the sale of the property to proceed. The requirements of the fourth element of the CGT cost base are satisfied (subsection 110-25(5) of the ITAA 1997). As such, the costs incurred by the trustees 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.

Legislative references: Income Tax Assessment Act 1997 subsection 110-25(5)
Subject references: Capital gains tax Capital gains CGT asset issues CGT cost base CGT deceased estate Compensation Legal title Legal expenses Negotiated settlements