Private ruling: Capital gains tax - deceased estate - cost base
Date of advice: 23 June 2016
Published: August 2016
Ruling period: Year ending 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Do legal costs of obtaining probate and legal costs of defending a claim form part of the cost base of the property for capital gains tax purposes? | A1: Yes. | Q2: Do the following costs incurred in relation to the disposing of the property form part of the cost base of the property for capital gains tax purposes: • agent's commission, • agent's advertising, • real estate agent fees, • legal fees, • valuation fees and • conveyancing fees? | A2: Yes. | Q3: Do costs of administering the estate, including ongoing legal fees and accounting fees form part of the cost base of the property for capital gains tax purposes? | A3: No. | Q4: Do the following holding costs incurred by the estate, form part of the cost base of the property for capital gains tax purposes: • council rates, • water rates, • emergency services levy, • land tax, • cleaning costs, • insurance, • general house maintenance, • repairs and • gardening? | A4: Yes. | Q5: Is the beneficiary required to include their share of the net income of the trust in their own personal tax assessment in addition to the estate submitting its return? | A5: Yes. | Q6: Is the capital gain made on the disposal of the property by the estate eligible for the CGT discount (using May 20xx market valuation and non-resident formula in section 115-115 of the ITAA 1997)? | A6: Yes.

Relevant facts and circumstances: The deceased passed away in the 19xx-xx financial year. The deceased purchased a property. The deceased purchased the property prior to 20 September 1985. The property was the deceased's main residence just prior to their death. The property was bequeathed to person A under the will of the deceased. The executors of the estate are person A and person B. Following the passing of the deceased, probate was granted on and the property was transferred to person B in their capacity as executor of the estate. The dwelling had a market value of $X on the date of death of the deceased. The dwelling had a market value of $X on May 20xx. The property was sold for $X in the 20xx-xx financial year. The discount capital gain on sale of the asset was less than the gain accrued up to May 20xx. The contract settled in the 20xx-xx financial year. Person A is the sole beneficiary of the property. Person A is and, always has been, a non-resident Australian for tax purposes. Person A does not have any other Australian sourced income for the 20xx-xx financial years apart from the capital gain. Person A, is not a beneficiary under any Australian resident trusts, other than the estate. The executor incurred expenses in defending an inheritance claim to the whole the Estate by person C. The property has never been rented out or otherwise used to produce assessable income. Person A has occasionally resided in the property since the passing of the deceased. The executors have incurred legal expenses in obtaining probate. The executors have incurred the following expenses in administering the estate: • accounting fees and • legal fees. The executors have also incurred holding costs since the date of the deceased.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 98(3), | Income Tax Assessment Act 1936 subsection 98A(1), | Income Tax Assessment Act 1936 subsection 98A(2), | Income Tax Assessment Act 1997 section 110-25, | Income Tax Assessment Act 1997 section 115-110, | Income Tax Assessment Act 1997 subsection 115-115(4) and | Income Tax Assessment Act 1997 subsection 112-30(1A).

Reasons for decision: Summary: Under section 110-25 of the Income Tax Assessment Act 1997 (ITAA 1997), capital expenditure incurred to preserve or defend your ownership of, or rights to, the asset form part of the fifth element of the cost base. In relation to legal costs to obtain probate, ATO ID 2001/729 explains that legal costs, incurred by the executor of a deceased estate in confirming the validity of the deceased's will, do form part of the cost bases of the estate's assets. In relation to legal costs to defend a claim to the estate, ATO ID 2001/730 explains that legal costs incurred by the executor of a deceased estate to defend a claim for control of the estate form part of the cost bases of the estate's assets. Therefore legal costs incurred in defending a claim to the estate form part and legal costs in obtaining probate, would form part of the fifth element of the cost bases of the estate's assets. | Detailed Reasoning - Other items for you to consider: This expenditure may need to be apportioned across the various assets of the estate in accordance with subsection 112-30(1A) of the ITAA 1997. | Detailed Reasoning - Question 2: Under section 110-25 of the ITAA 1997, incidental costs of acquiring the capital gains tax (CGT) asset or costs that are incurred in relation to the CGT event that happens to it (including its disposal), form part of the second element of the cost base. These costs include: • remuneration for the services of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal adviser, • costs of transfer, • stamp duty or other similar duty, • costs of advertising or marketing (but not entertainment) to find a seller or buyer, • costs relating to the making of any valuation or apportionment to determine your capital gain or capital loss, • search fees relating to an asset, • the cost of a conveyancing kit, • borrowing expenses, • expenditure that is incurred as a direct result of your ownership of a CGT asset ending. Therefore the following costs incurred in relation to disposing the property would be included in the cost base of the property: • agent's commission, • agent's advertising, • real estate agent fees, • legal fees, • valuation fees and • conveyancing fees. | Detailed Reasoning - Question 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). | 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). Therefore the costs of administering the estate, including ongoing legal fees and accounting fees, do not fall within any elements of the cost base, and therefore would not be able to be incorporated into the cost base of the deceased estate's assets. | Detailed Reasoning - Question 4: Under section 110-25 of the ITAA 1997, costs of owning an asset form part of the third element of the cost base. These costs include; • rates or land tax, • interest on money you borrowed to acquire the asset, • land taxes, • costs of maintaining, repairing or insuring it. However you do not include such costs if you acquired the asset before 21 August 1991. Also, you do not include them if you: • have claimed a tax deduction for them in any income year, or • did not claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not ended. Therefore the following costs incurred by the estate, in relation to the property, would be included in the cost base of the property: • councils rates, • emergency services levy, • land tax, • cleaning costs, • insurance, • general house maintenance, • repairs & • gardening. | Detailed Reasoning - Question 5: The executor is required to lodge a return where the deceased estate: • earns any amount of income including capital gains • receives franked dividends (after the date of death) and they want to claim franking credits • receives income from which tax has been withheld, or • has carried on a business. Furthermore if the beneficiary is presently entitled and a non-resident of Australia for tax purposes, the trustee is liable to pay tax on their share of the trust income at the non-resident tax rates. However tax assessed to a trustee in relation to a non-resident beneficiary is generally not a final tax. If the trustee is assessed under subsection 98(3) of the Income Tax Assessment Act 1936 (ITAA 1936) in respect of an individual beneficiary, those beneficiaries are assessed under subsection 98A(1) of the ITAA 1936 and allowed a credit under subsection 98A(2) of the ITAA 1936 for tax paid by the trustee. Therefore in your case, as the estate has made capital gain in the 20xx-xx financial year, then the executor is required to lodge a return for the deceased estate. As person A, is an individual non-resident beneficiary, and is presently entitled to the distribution, the trustee is liable to pay tax on their share of income. However person A is also required to lodge a return but will be allowed a credit for tax paid by the trustee. | Detailed Reasoning - Question 6: Recent amendments to taxation legislation introduced under Subdivision 115-B of the ITAA 1997 have reduced the discount percentage applicable to a discount capital gain of an individual where the individual was a foreign resident for some or all of the period that a CGT asset was held after May 20xx. However individuals who were foreign residents on May 20xx can receive the full CGT discount for gains accrued up to that date. The market value of the CGT asset at May 20xx is required to quantify the gain attributable to that earlier period. Individuals who do not have a market valuation will be ineligible for the CGT discount on gains accrued prior to May 20xx. This is regardless of whether the individual made the discount capital gain directly or as a result of being a beneficiary of a trust. However per subsection 115-115(4) of the ITAA 1997, if the gain accrued up to May 20xx (otherwise known as the excess) is equal to or greater than the total discount capital gain from the CGT asset, the full discount percentage of 50 per cent applies. Therefore in your case, as you acquired a market value of the property as at May 20xx and the excess is greater than the total discount capital gain from the CGT asset, the beneficiary will ultimately be entitled to the full discount percentage of 50%. | Detailed Reasoning - Other items for you to consider: Where a trustee is assessed under section 98 of the ITAA 1936, the discount percentage for a discount capital gain is reduced under section 115-120 of the ITAA 1997 in respect of an individual beneficiary to the extent that the individual beneficiary was a temporary resident for some or all of the period that the CGT was held after May 20xx. The percentage is reduced in the same way as if the beneficiary had accrued the gain. This ensures comparable treatment for beneficiaries, regardless of whether they are taxed directly or the trustee is taxed on their behalf. However as mentioned above as the excess is greater than the total discount capital gain, the full discount percentage of 50% still applies.