Private ruling: Capital gains tax – calculation of assets cost base
Date of advice: 10 May 2018
Published: July 2018
Ruling period: 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the date of acquisition of property received from a deceased estate the date of the death of the deceased? | A1: Yes | Q2: Will the Commissioner exercise his discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and determine a different date of acquisition? | A2: Not Applicable | Q3: Do the costs incurred in response to challenges to the deceased will form part of the cost base of the property? | A3: No. | Q4: Do the costs of litigation form part of the costs base of the property? | A4: No. | Q5: Do the costs for maintaining the property form part of the cost base? | A5: Yes.

Relevant facts and circumstances: You received a number of assets including a property as part of a deceased estate. You sold the property within the 20XX financial year. The will of the deceased was challenged and legal action took place. As trustee of the deceased estate, you were required to pay several amounts relating to these challenges, none of which were related to the property you received. You incurred legal costs as trustee for the deceased estate. The deceased estate incurred maintenance costs for the property during the time of legal action.

Relevant legislative provisions: Subdivision 110-A of the ITAA 1997 | Section 118-195 of the ITAA 1997 | Division 128 of the ITAA 1997

Reasons for decision: Summary: The Commissioner’s discretion as described in section 118-195 of the ITAA 1997 only allows for the Commissioner to extend the two year period for the CGT exemption on disposal of a property received from a deceased estate. It does not allow the Commissioner to determine the date on which an asset was acquired. Under division 128 of the ITAA 1997 a beneficiary of a deceased estate is taken to have acquired the assets of the estate on the date of the deceased’s death. | Detailed Reasoning - Question 2/3/4/5/: Subdivision 110-A provides the rules for the calculation of the cost base of an asset. There are five elements that make up the cost base of an asset which are defined under subsection 110-25. These elements are: 1. Money paid or property given for the CGT asset 2. Incidental costs of acquiring the CGT asset or that relate to the CGT event 3. Costs of owning the CGT asset 4. Capital costs to increase or preserve the value of your asset or to install or move it 5. Capital costs of preserving or defending your title or rights to your CGT asset | Detailed Reasoning - Element 1: The first element is the total of the money you paid to acquire the asset and the market value of any other property you gave or are required to give in acquiring the asset. As the property was acquired as part of a deceased estate the rules outlined under division 128 of the ITAA 1997 apply. You are taken to have acquired the property on the date of the deceased’s death at the market value on that date. None of the expenses you incurred will contribute to this element of the cost base. | Detailed Reasoning - Element 2: The second element of the cost base relates to the incidental costs that you have incurred in acquiring the Property. You acquired the asset as part of a deceased estate. The costs you incurred are related to the legal action taken against the deceased estate and not against your ownership of the property. These costs are not incidental to your acquisition of the property and therefore do not form part of this element of the cost base. Nor were they incurred by the estate in acquiring the Property. | Detailed Reasoning - Element 3: Subsection 110-25(4) of the ITAA 1997 provides the following: The third element is the costs of owning the *CGT asset you incurred (but only if you *acquired the asset after 20 August 1991). These costs include: a) interest on money you borrowed to acquire the asset; and b) costs of maintaining, repairing or insuring it; and c) rates or land tax, if the asset is land; and d) interest on money you borrowed to refinance the money you borrowed to acquire the asset; and e) interest on money you borrowed to finance the capital expenditure you incurred to increase the asset's value. This list is not exclusive and can include other costs of ownership that have not been listed. However, the amounts paid as a result of the challenge of the will are not costs related to the ownership of the property for you or the estate. These amounts are related to the legal action taken against the deceased estate. They will not form part of this element of the cost base. Whilst the costs for maintaining the property were not incurred by you, they were paid by the deceased estate. They will form part of this element of the cost base as per the application of subsection 128-15(5). Subsection 128-15(5) provides: A beneficiary can include in the *cost base or *reduced cost base of the asset any expenditure that the *legal personal representative would have been able to include at the time the asset *passes to the beneficiary. The beneficiary can include the expenditure on the day the representative incurred it. As the costs for maintenance of the paid by the estate and would have been included in the cost base by the estate if it owned the property, you can include them in the cost base. The legal costs you incurred were paid for out of the deceased estate and were not incurred by you. Similarly, whilst they were incurred by the deceased estate they were not incurred by the estate in owning the property. They will not form part of this element of the cost base. | Detailed Reasoning - Element 4: The fourth element of the cost base relates to capital expenditure incurred for the purpose of increasing or preserving the property’s value. The expenditure was incurred by the deceased estate and was not in relation to the increase or preservation of the property’s value. None of the expenditure will form part of this element of the cost base. | Detailed Reasoning - Element 5: The fifth element is made up of the capital expenditure incurred to establish, preserve or defend your title to the asset, or a right over the asset. The expenditure relating to the maintenance of the property is included as part of the third element of the cost base and is therefore not included as part of the fifth element. The amounts paid in relation to the legal action were not incurred for the purpose of establishing, preserving, or defending your or the estate’s title or right over the asset. The amounts were related to claims against the estate and not the property specifically. Further to this the amounts were not incurred by you but were incurred by the estate. Similarly, the legal expenses were in related to claims against the deceased estate and incurred by the estate they are not related to defending the title or right to the property. None of these costs will form part of this element of the cost base.