Private ruling: Deceased estate
Date of advice: 16 November 2015
Published: January 2016
Ruling period: Year ended 30 June 20YY
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the Commissioner exercise his discretion to assess the Trustee on the income of the estate under section 99 of the Income Tax Assessment Act 1936 (ITAA 1936) for the 20XX-YY financial year? | A1: Yes. | Q2: Do the costs associated with subdividing Area A, form part of the cost base for the land? | A2: Yes. | Q3: Might a portion of the $X paid to Individual A under the Terms of Settlement form part of the cost base of the land? | A3: No. | Q4: Might a portion of the value of the debt owed by the Family Trust ('the Trust') to the Estate and which was forgiven under the Terms of Settlement form part of the cost base of the land? | A4: No. | Q5: Might a portion of the costs of defending the Part IV claim form part of the cost base of the land? | A5: Yes. | Q6: Should the apportionment of the costs of, and payments for, defending and settling the Part IV claim be based on the relative estimated values of the respective claims? | A6: Yes, but only in relation to costs of defending the Part IV claim.

Relevant facts and circumstances: Individual B and C purchased property as joint tenants prior to 1985. Individual B died after 1985 and individual C became the sole owner of the land by survivorship. Later individual C made individual A a joint owner of two titles, to ensure they would become sole owner on Individual C's death. This was a gift. Individual C died on leaving a will and had X children and Y known grandchildren. Individual A made a testator's family maintenance claim against the Estate making various claims. The claim was settled and under the terms of the settlement: • a payment was made to individual A • a debt owned by the Family Trust was forgiven In defending the Part IV claim the Estate incurred expenses including legal and valuation fees. No distribution was made to any beneficiaries during the 20XX-YY financial year.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 99 | Income Tax Assessment Act 1936 section 99A | Income Tax Assessment Act 1997 section 110-25

Reasons for decision: Summary: Taxation of trust income Generally, if no beneficiary of a trust estate is presently entitled to the net income of the estate, the trustee is assessed under section 99A of the ITAA 1936. Section 99A of the ITAA 1936 does not apply in the following circumstances • the trust resulted from a will • the trust is a bankrupt estate, or • the trust is a trust that consists of property referred to in paragraph 102AG(2)(c) of the ITAA 1936 and the Commissioner forms the opinion that it would be unreasonable to apply section 99A of the ITAA 1936 in such circumstances. In considering the facts of this case, the Commissioner is of the opinion that it would be unreasonable that section 99A of the ITAA 1936 should apply in relation to the trust estate. The Commissioner has exercised his discretion that section 99A of the ITAA 1936 does not apply for the 20XX-YY financial year. | Detailed Reasoning - Cost base of land: Subdivision costs Section 110-25 of the ITAA 1997 sets out the five elements that make up the cost base of an asset for CGT purposes. Subsection 110-25(5) of the ITAA 1997 states that the fourth element of an asset's cost base includes any capital expenditure the taxpayer incurred to increase or preserve the asset's value. In this case, the Estate has incurred expenses in subdividing Area A so that a portion of the land was placed onto a separate title. The title was then transferred to individual A. The expenditure incurred preserved the value of the remaining land as it allowed it to be included in the contract for sale. The expenditure incurred to preserve the value qualifies as part of the fourth element of the land's cost base. $X paid to individual A under the Terms of Settlement Under the Terms of Settlement, individual A will receive an additional $X in priority out of the residue after the Estate costs are paid. As stated above, the fourth element of an asset's cost base included any capital expenditure incurred to increase or preserve a CGT asset's value. In Smith v. Commissioner of Taxation [2006] AATA 1072 the taxpayer was the sole owner of an investment property. The taxpayer and his spouse separated and a under a consent order of the Family court of Australia the taxpayer was required to pay his wife the sum of $230,000. If he failed to pay the sum, the property was to be sold and his wife paid from the proceeds. The taxpayer paid a cash settlement to his former wife and claimed the $230,000 as being incurred to preserve the value of a CGT asset (the investment property). The AAT held that whilst the cash payment to the former wife allowed the taxpayer to retain ownership of the investment property, the payment was made to comply with the terms of the consent order and not to preserve the value of the investment property. Similarly, the payment could not be said to establish, preserve or defend the title of the Estate to the land. The payment will be made to comply with the Terms of Settlement to which the Executors of the Estate have consented to. Whilst it settled claims over the land, the payment is part of a redistribution of the residue of the Estate and not expenditure to increase or preserve the value of the land. The fifth element of the cost base of a CGT asset includes capital expenditure to preserve or defend the ownership of or rights to the asset. Whilst the action taken by individual A required the Estate to defend the ownership of a portion of the land, again the payment is essentially a redistribution of the beneficiaries existing entitlements under the will. It is not considered to be a capital cost in preserving or defending the ownership of the property. Therefore no portion of this amount can be included in the cost base. Trust debt forgiven under the Terms of Settlement The Trust owed a debt to the deceased. Individual A controls the Trust and the debt was forgiven by the Estate under the Terms of Settlement. A debt owing to the Estate is a CGT asset. Had the debt 'called in' by the Executors the proceeds would form part of the residue, been divided and distributed as per the will. The forgiveness of the debt is essentially a redistribution of the beneficiaries' entitlements under the will. As such, the forgiveness of the debt is not considered have been incurred in preserving or defending the ownership of the property. Therefore no portion of this amount can be included in the cost base. Costs of defending the Part IV claim In this case, the legal costs incurred in relation to the challenge of the deceased's will are included under the fifth element of the cost base. These costs were incurred in preserving and defending the ownership of the deceased's assets for the beneficiaries. Apportionment of expenses TD 93/29 discusses the apportionment of legal expenses. Where legal expenses are incurred in relation to proceedings that relate both to amounts that are revenue in nature as well as amounts which are capital in nature, there must be some fair and reasonable assessment of the extent of the relation of the outlay to assessable income. Where the solicitors account is itemised, one reasonable basis for apportionment would be the time spent involving the revenue claim, relative to the time spent on the capital claim. If the solicitors account is not itemised, a possible basis for apportionment would be either a reasonable costing of the work undertaken by the solicitor in relation to the revenue claim, or, where this is not possible, an apportionment on the basis of the monetary value of the revenue claim relative to the capital claim. In this case we consider it would be reasonable to apportion the costs of defending the Part IV claim on the basis of the value of the claims.