Private ruling: Deceased estate and valuations
Date of advice: 17 November 2016
Published: March 2017
Ruling period: Year ended 30 June 20YY | Year ended 30 June 20ZZ
Date scheme commenced: 1 July 20XX

Ruling: Q1: Can the legal personal representative use a date of death valuation conducted by a registered valuer in an arm's length transaction for the purpose of determining the cost base for the sale of two properties in a deceased estate? | A1: Yes. | Q2: Do the following legal costs incurred by the Estate, form part of the cost base of the properties for capital gains tax (CGT) purposes: ● Gaining court approval for the sale of both properties, ● Litigating injunctions to selling the properties, and ● Defending the land titles? | A2: Yes. | Q3: Do the remaining legal costs incurred by the Estate, form part of the cost base of the properties for CGT purposes? | A3: No.

Relevant facts and circumstances: The deceased died in 20AA. At the time of death the deceased owned two parcels of land. Property A was on two titles. Both titles were acquired before 20 September 1985. Property B was acquired before 20 September 1985. As at the deceased's date of death there had been no improvements made to Property A and there was an old house that was the main residence prior to death on Property B. Upon the deceased's passing it was found that they had two Wills. The first was dated 20BB the second in 20CC. Each Will appointed a different executor and trustee for the Estate. All three persons appointed were Solicitors. In the course of administering the estate legal costs were incurred.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 110-25 | Income Tax Assessment Act 1997 Section 128-15 | Income Tax Assessment Act 1997 Section 995-1

Reasons for decision: Detailed Reasoning - Cost Base: Subsection 128-15(4) of the Income Tax Assessment Act 1997 (ITAA 1997) contains a table that sets out the modifications to the cost base and reduced cost base of the CGT asset in the hands of the legal personal representative or beneficiary. Specifically it sets out that for a CGT asset, the first element of the cost base or reduced cost base is: ● for a CGT asset the deceased acquired on or after 20 September 1985, the deceased's cost base or reduced cost base of the asset on the date of death ● for a CGT asset the deceased acquired before 20 September 1985, the market value of the asset on the date of death. For example, if a share the deceased acquired prior to 20 September 1985 passes to their beneficiary, the first element of the cost base for the beneficiary is the market value of the share on the date of the deceased's death. If the deceased acquired the share on or after 20 September 1985, the first element of the cost base for the beneficiary is the deceased's cost base of the shares on the date of their death. | Detailed Reasoning - Question 2 and 3: Section 110-25 of the ITAA 1997 contains the five element of the cost base. In order for a cost to be incorporated into the cost base of the estate's assets, it must fall within the elements of the cost base. These elements are: | 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). | 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). | 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 can include: interest on money borrowed to acquire the asset, costs of maintaining, repairing or insuring it, rates or land tax, interest on money you borrowed to refinance to acquire the asset and interest on money you borrowed to finance the capital expenditure you incurred to increase the assets value. However, this element does not apply in working out a capital loss. | 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). | 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). | Detailed Reasoning - Reduced cost base: When a CGT event happens to a CGT asset and you haven't made a capital gain, you need the asset's reduced cost base to work out whether you have made a capital loss. The reduced cost base of a CGT asset has the same five elements as the cost base, except for the third element which instead includes balancing adjustment amounts. | Detailed Reasoning - Application to your circumstances: In your case, legal costs incurred in gaining court approval for the sale of the properties, litigating injunctions placed upon the properties and defending the land titles are considered fifth element expenditure. Therefore these costs can be incorporated into the cost base of the deceased estate's assets on a prorated basis. However, the remaining costs cannot be incorporated in the cost base. While some of these remaining costs may be considered third element expenditure (as described in subsection 110-25(4) of the ITAA 1997) they cannot be included as the Estate will not make a capital gain on the sale of either property.