Private ruling: Deceased estate
Published: July 2011
Ruling period: Year ended 30 June 2010
Date scheme commenced: 1 July 2009

Ruling: Question and answer | Can you as the beneficiary of a deceased estate claim a deduction for legal expenses incurred in your role as executor? | No | Can you as the beneficiary of a deceased estate claim a deduction for the upkeep of estate's property? | No | Can you as the beneficiary of a deceased estate claim a deduction for the upkeep of companion animals? | No | Can you as the beneficiary of a deceased estate include the cost of rates, insurance, and repairs in your cost base? | Yes | Can you as the beneficiary of a deceased estate include expenses associated with the upkeep of companion animals in your cost base? | No | Can you as the beneficiary of a deceased estate include legal expenses incurred in your role as executor in your cost base? | No

Relevant facts and circumstances: You were the executor and beneficiary of a deceased estate. The estate sold a dwelling. You received a distribution from the deceased estate in the form of a capital gain. The will of the deceased empowered you to postpone sale of the real estate for so long as you thought fit. You have indicated you postponed the sale of the dwelling because the deceased wanted the sale of the property postponed until certain companion animals lived out their life on the property and that your costs incurred in maintaining the property and companion animals be reimbursed to you. A statement of claim was made in the Supreme Court. The claim was made by one of the beneficiaries of the estate against you in your role as executor. Under the claim, the Supreme Court issued orders that you to convert and distribute the estate. The court order ruled in favour of the other beneficiaries and you were denied reimbursement of costs in relation to maintaining the property. Your expenses included: Council and Rural Land Protection Rates Insurance Electricity Repairs & Maintenance Animal food Veterinarian Fees You incurred legal expenses defending your position in the Supreme Court.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 8 | Section 110-25 | Section 110-35 | Section 110-55 | Section 128-15

Reasons for decision: Detailed Reasoning - Deductions: There are two types of deductions which are general deductions and specific deductions. A general deduction is any loss or outgoing to the extent that it is incurred in gaining or producing assessable income. A specific deduction is an amount which is deductible under any provision specified by the Tax Assessment Acts. The expenses of animal food and veterinarian fees were not expenses that were attributable to either an asset or trading stock. These were expenses that were incurred for the upkeep of companion animals. Expenses associated with the upkeep of companion animals do not meet the definition of an outgoing which you can deduct under the general deduction provisions or a specific deduction listed in Division 8 of the ITAA 1997. These expenses are considered private in nature and can not be deducted [section 8-1(2)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)]. Expenses incurred in the upkeep of a property from which no income is being sourced, are not incurred in gaining or producing assessable income. The legal fees that you incurred was in your role as the executor of the estate and not as the beneficiary of the estate. These legal expenses incurred were not for the purpose of producing assessable income of the estate, not did they determine the beneficiaries level of entitlement to distributions of the corpus of the estate. You are therefore not entitled to a deduction under section 8-1 of the ITAA 1997 for legal expenses incurred in defending an action against the estate. | Detailed Reasoning - Cost base: The cost base and reduced cost base of an asset each consist of five elements (sections 110-25 and 110-55 of the ITAA 1997). The elements of the reduced cost base of a CGT asset are the same as those for cost base except for the third element (subsection 110-55(2) of the ITAA 1997). A beneficiary of a deceased estate can include in the cost base and reduced cost base of an asset previously owned by the deceased person any expenditure their legal personal representative would have been able to include at the time the asset passes to the beneficiary. The beneficiary is taken to have incurred the expenditure on the day the representative incurred it [subsection 128-15(5) of the Income Tax Assessment Act 1997 (ITAA 1997)]. | Detailed Reasoning - First element: The first element of cost base and reduced cost base is the total of the money paid, or required to be paid, and the market value of property given, or required to be given, in respect of the acquisition of the asset (subsection 110-25(2) of the ITAA 1997). In the context of subsection 110-25(2) of the ITAA 1997, regard must be had to the presence of other elements of cost base. In particular, the specific inclusion of incidental costs of acquisition in the second element of cost base indicates that 'incidentals' would not ordinarily be included in the first element of cost base. Accordingly, none of your expenses were incurred in respect of acquiring the assets of the estate. | Detailed Reasoning - Second element: The second element of cost base and reduced cost base is the incidental costs that the taxpayer incurs in acquiring the CGT asset or which relate to a CGT event that happens in relation to the CGT asset (subsection 110-25(3) of the ITAA 1997). Section 110-35 of the ITAA 1997 sets out the types of incidental costs. Second element costs are typically costs which facilitate the acquisition of a CGT asset. One of these types of incidental costs is stamp duty or other similar duty. None of your expenses were incurred to support the transfer of the property. | Detailed Reasoning - Third element: The third element of cost base is the non-capital costs of ownership (subsection 110-25(4) of the ITAA 1997). These costs include: · Interest on money borrowed to acquire an asset; and · Costs of maintaining, repairing or insuring it; and · Rates or land tax, if the asset is land; and · Interest on money you borrowed to refinance the money you borrowed to acquire the asset; and · Amongst your expenses incurred, you paid rates to your local council and rates to the Rural Lands Protection Board, you also incurred repair expenses and paid for insurance premiums. Where the expense of electricity is attributable to the cost of maintaining and repairing the property, it can be included in the third element. These costs are included in the third element of your cost base. | Detailed Reasoning - Fourth element: The fourth element of cost base and reduced cost base is capital expenditure incurred to increase the asset's value and which is reflected in the state or nature of the asset at the time of the CGT event (subsection 110-25(5) of the ITAA 1997). You have not specifically attributed an expense or category of expense which attributed to an increase in the asset's value. None of your expenses fall under the fourth element. | Detailed Reasoning - Fifth element: The fifth element of cost base or reduced cost base is capital expenditure incurred to establish, preserve or defend the title to the asset, or a right over the asset (subsection 110-25(6) of the ITAA 1997). Your entitlement to your share of the estate was not in dispute. The legal fees that you incurred was in your role as the executor of the estate and not as the beneficiary of the estate. You therefore did not incur an expense under the fifth element. | Detailed Reasoning - Conclusion: The cost base of the CGT asset is increased to include your expenses of council rates, Rural Lands Protection Board Rates, repair expenses, insurance premiums and electricity usages expenses incurred in the maintenance or repair of the property.

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