Private ruling: Legal expenses
Published: January 2014
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013
Date scheme commenced: 1 July 2010

Ruling: Q1: Do legal expenses incurred by the Estate form part of the cost base of an investment property owned by the deceased at their date of death? | A1: Yes.

Relevant facts and circumstances: You are the trustee of a deceased estate (the Estate). The deceased had more than one will prepared prior to their death. The final will bequeathed the assets of the Estate to Entity X. Prior wills had bequeathed the assets of the Estate to family members. The family members challenged the validity of the will. The case was settled at mediation. Entity X accepted a settlement and the remainder of the Estate's assets were inherited by the family members. The Estate incurred legal expenses during the course of the dispute.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 110-25 | Income Tax Assessment Act 1997 Section 128-15 Reasons for decision | The cost base of a capital gains tax (CGT) asset is made up of five elements: | 1. money or the market value of the asset | 2. incidental costs of acquiring the CGT asset | 3. costs of owning the asset | 4. capital costs to increase or preserve the value of the asset or to install or move it | 5. capital costs of preserving or defending the ownership of or rights to the asset. | Legal expenses incurred by the Trustee during the dispute are considered to be capital costs of preserving or defending the ownership of or rights to the Estate's assets. Thus, this expenditure forms part of the fifth element of the assets' cost base.