Private ruling: Legal expenses
Date of advice: 30 March 2016
Published: May 2016
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2012

Ruling: Q1: Do legal fees incurred in defending your title to the asset form part of the fifth element of the cost base in respect of the shares? | A1: Yes

Relevant facts and circumstances: In 20xx you received a transfer of shares from a relative. From 20xx until the present you have been the registered shareholder of these shares. In 20xx you received notification from a solicitor that your relative was seeking to commence legal proceedings against you, claiming that the shares belonged to them. You have incurred legal expenses in defending this claim.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 110-25(6)

Reasons for decision: Summary: Subsection 110-25(6) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that capital expenditure you incur to establish, preserve or defend your title to the asset or a right over the asset will form the fifth element of your cost base. Legal expenses relating to defending your title or right to an asset will generally fall within the fifth element of your cost base. It is immaterial, from the point of view of subsection 110-25(6) of the ITAA 1997 whether the action is settled out of court or is the subject of contested proceedings. Defending ones title or right would cover the situation whereby another person or entity lays a claim to the asset (either in whole or in part) and institutes legal proceedings to establish that claim. The costs in defending such claims would be costs in defending the title to the asset. In your case you incurred legal fees in defending your ownership of shares. The legal fees were incurred in connection with securing an enduring (lasting) benefit which is to retain ownership of the shares. Accordingly, the legal fees were paid in defending your title to the asset. As such, the legal fees will form part of the fifth element of your cost base in respect of the shares.