Private ruling: Settlement payment and legal fees - cost base
Published: March 2014
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Will the settlement payment and the legal fees that you incurred be included in the cost base of the property? | A1: Yes.

Relevant facts and circumstances: You purchased a rental property sometime after 20 September 1985. The property was purchased as an investment property and was rented from the time of purchase up until its eventual sale. Some years later the property was listed for sale with a real estate agent (agent). A short time later a Contract for Sale of Land by Offer & Acceptance was presented to you to sell the property for a certain amount. The contract was subject to finance approval, a repair being made and other smaller annexures, with settlement to be within 28 days of finance approval. You advised the agent that is was the current tenant's responsibility arrange for the repair and the agent confirmed that he would get the appropriate paperwork to advise the tenants to do so. The agent advised you to sign the Offer & Acceptance anyway which you did. A short time later, you received a phone call from the agent advising that the buyers still wanted the repair completed and that the buyers had "gone cold". Your impression was that the contract had become null and void and you advised the agent to take the house off the market. You were, of the opinion after the phone call that the house was now not bound by the contract and that you were free to do with the property as you wished. At no point did the agent advise you that the contract was still binding or that you could not remove the property from the market as it was still under contract or that you were bound to proceed with the sale. Nor did you receive any of this communication in writing from the agent. Believing the first contract had become void, you entered into a new Contract for Sale of Land by Offer & Acceptance a short time later to sell the property for the same value. The terms to this contract were a cash purchase, substantial deposit, rent compensation clause and a certain amount for property, plant and equipment, with settlement to be effected between specified dates. As a result of the two contracts, the first purchaser's lodged a caveat over the property, meaning the property could not be sold to the second purchaser's until the matter was resolved. In settling the dispute, you were required to pay a settlement payout to the first purchaser's, return their deposit and you also incurred legal fees.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 110-25.

Reasons for decision: Summary: Any capital gain arising from the disposal of a capital gains tax (CGT) asset is calculated using the cost base of that asset. The cost base of a CGT asset consists of five elements: • The first element, being the acquisition costs, is the total of the money paid, or required to be paid, in respect of the acquisition. • The second element is the incidental costs that the taxpayer incurs in acquiring the asset of which relate to a CGT event that happens in relation to the asset. • The third element is costs of ownership, including both capital and non-capital costs. • The fourth element is capital costs associated with increasing or preserving the value of your asset, or installing or moving the asset. • The fifth element is capital expenditure incurred by a taxpayer in establishing, preserving or defending their title to an asset, or right over an asset. The settlement amount and legal fees were incurred by you so that you could retain title to the property. It was an amount paid so that the first purchaser would agree to termination of the contract as opposed to enforcing your performance of the contract. The effect of the termination was that you retained the title to the property. Accordingly, the settlement amount and legal fees are able to be included in the fifth element of the cost base of the property.