Private ruling: CGT - cost base
Date of advice: 16 January 2023
Published: 13 November 2023
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: 17 December 20XX

Ruling: Q1: Do the costs incurred by the executor 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 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: The deceased, the Parent of the applicant, passed on XX XX 20XX. Just before the deceased's passing, the property contained the following: • a main dwelling that was used as the Deceased's main residence and the 'adjacent land' within the meaning of the section 118-120 of the Income Tax Assessment Act 1997 (ITAA 1997) (main dwelling portion); and • a 'granny flat' on the property was rented out by the deceased (granny flat portion) The deceased made a will on X XX 20XX. The applicant was named as the sole executor in the will. Probate was granted confirming the applicant as the executor on XX XX 20XX. At the time of death, the deceased co-habited the property with their partner. The distribution of the estate of the deceased in accordance with the will as follow: • a sum $XX,000 was gifted to a beneficiary of the will; and • the residue of the estate was to be divided between applicant and their sibling (also beneficiaries), in equal shares as tenants in common There was no provision in the will for the former partner of the deceased. On XX X 20XX a transmission application was lodged for the property and as a result, the beneficiaries became the registered owner of the property. In around XX 20XX the former partner of the deceased made it known their intention to commence proceedings against the estate under Chapter 3 of the Succession Act 20XX. The claim was premised on the argument that the former partner was in a de facto relationship with the deceased as at the date of death. It was accepted that the former partner was an eligible person to bring a claim against the estate under section 57 of the Succession Act. It was acknowledged that there was grounds to support a finding that the former partner should have provision from the estate. In or around XX 20XX the former partner, the beneficiaries and the executor entered into a deed of settlement and release. The deed was intended to settle any potential claim that the former partner may have against the estate and prevent formal proceedings being brought against the estate. As part of the deed, the parties agreed that the executor of the estate would pay the former partner a sum of $XXX,000.00 (settlement sum) to settle any further claim for provision form the estate. The sum shall be paid either: • by the executor by way of lump sum payment no later than 90 days from the date of the Deed; or • from the net sale proceeds of the property on settlement, which shall be listed for sale no later than 90 days from the date of this deed. The burden of the provision and sum payable to the former partner out of the deceased's estate shall be borne equally by the residuary beneficiaries of the deceased's estate named in the will, namely the executor and their sibling in equal shares. At the time that the deed was entered into, the estate did not have sufficient assets to pay the settlement sum to the former partner, and as provided for by clause 6, the settlement sum was to be paid by the beneficiaries in equal shares. That is, from entering into the deed, the executor and their sibling were legally bound to contribute to the settlement sum in equal shares. In the event the dispute with the former partner had not been settled, and they had successfully brought a claim for provision, the executor of the estate, it is likely that the State Supreme Court would have made one of a number of orders, including: • appointing a trustee for sale of the property in accordance with section 66 of the Succession Act; or • restoring the property to the estate under section 79 and/or section 81 of the Succession Act, which would have extinguished the beneficiaries' rights to the property: see section 84 of the Succession Act. On XX XX 20XX settlement of the sale of the property by the beneficiaries occurred. From the net proceeds of sale, the beneficiaries accounted for by the executor for the settlement in accordance with clause 6 of the deed so that as executor could pay the settlement sum to the former partner as required by clause 5(b) of the deed.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 110-25(5)

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. ATO ID 2004/425 - Capital gains tax: deceased estate - cost base of CGT asset - fourth element, highlights this position by the following, '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. In your case, the former spouse of the deceased made it known their intention to commence proceedings against the estate. The claim was premised on the argument that they were in a de facto relationship with the deceased for many years up until their date of passing. A deed of settlement and release was then entered into and agreed on by the former spouse, the beneficiaries and the executor. The deed was intended to settle any potential claim the former spouse may have against the estate and prevent further formal proceedings being brought against the estate. As beneficiaries of the estate the settlement sum of $XXX,000 was paid by you and your sibling ($XXX,000 each), in order to remove an impediment to the sale of the property and any further claim against the estate. The former spouse's claim for provision from the estate was an issue which needed to be resolved before the sale of the property could proceed and the estate finalized. The requirements of the fourth element of the CGT cost base are therefore satisfied. As such, the costs incurred by you to settle the dispute, form part of the cost base of the estate's asset - the property under subsection 110-25 (5) of the ITAA 1997.