Private ruling: CGT - deceased estate
Date of advice: 5 October 2023
Published: 20 November 2023
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will costs associated with establishing the site on the property including obtaining advice, and compliance with council requirements form part of the cost base of the property for capital gains tax purposes? | A1: No. | Q2: Will costs incurred in establishing the lease and right of access to the site during the sale process form part of the cost base of the property for capital gains tax purposes? | A2: No.

Relevant facts and circumstances: The deceased died several years ago. At the time of death, the deceased owned a property, which was their main residence. The deceased had expressed their wishes to be buried on the property. The executors sought to have the deceased buried on the property. Whilst there was a process under Council by-laws for creating a grave site on private property, there was no precedent for this process. Ultimately, the Council required a deed to be executed by the executors which included, amongst other things, obligations on the executors to "secure ongoing access to the burial site for family members of the deceased and invitees" that will endure after the family disposes of the land. The deceased was subsequently buried in the grave site on the property pursuant to their wishes. When the decision was made by the executors to sell the property, expert advice was required to secure access to the grave site in accordance with the abovementioned deed. Eventually, it was determined that that the only option was to establish a lease over the grave site, make that lease a condition of the sale contract, create a boundary structure and gate, and to effect right of access from the road to the grave site. All of these stipulations were included in the property sale contract which both limited the pool of potential purchasers and most likely reduced the potential sale price for the property. The costs incurred included: • Consultants and planning advice fees • Legal fees for correspondence with Council and the state government, and drafting applications and lease. • Registration fees • Fencing The property on which the grave site is located was sold and sale has resulted in a capital gain in the relevant year.

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

Reasons for decision: Summary: Subdivision 110-A of the Income Tax Assessment Act 1997 (ITAA 1997) contains the rules for working out the cost base of a CGT asset. Where an expense relates to a CGT asset and cannot be claimed as a deduction, it may be able to be included as part of the cost base of the CGT asset. Section 110-25 of the ITAA 1997 provides the general rules regarding cost base. The cost base consists of five elements: • Acquisition costs (the money you paid, or are required to pay, in respect of acquiring it) • Incidental costs • Non-capital ownership costs which are not deductible elsewhere • Amounts which increase or preserve the value of the asset • Amounts incurred in establishing, preserving or defending your title to the asset, or right over the asset Expenditure is capital in nature where it is made with a view to bring into existence an asset or advantage that is of enduring benefit. Capital expenditure is characterised by the fact that it is usually a one-off payment and establishes, replaces, or enlarges the income producing asset. | Detailed Reasoning - Fourth element of the CGT cost base: Subsection 110-25(5) of the ITAA 1997 relates to the fourth element of a cost base and includes capital expenditure you incurred to: (a) increase or preserve the asset's value; or (b) install or move the asset. For expenditure to be included in the fourth element of the cost base of an asset under paragraph 110-25(5)(a) of the ITAA 1997, it must be incurred 'to' enhance the value of the asset, that is, for the purpose of enhancing the value of an asset. It is immaterial whether or not the expenditure in fact enhances the value of the asset. | Detailed Reasoning - Fifth element of the CGT cost base: The fifth element of the cost base, under subsection 110-25(6) of the ITAA 1997, is capital expenditure that you incurred to establish, preserve or defend your title to the asset or right over the asset. | Detailed Reasoning - Your circumstances: The costs associated with establishing the grave site on the property, including obtaining advice and compliance with council requirements, were incurred in order to comply with the deceased's wishes to be buried on the property rather than being incurred to increase or preserve the value of the property. Therefore, they do not form part of the fourth element of the property's cost base. Also, these costs were not incurred to establish, preserve or defend your title to the property or right over the property and therefore they do not form part of the fifth element of the property's cost base. The costs associated with establishing the lease and right of access to the grave site cannot form part of the cost base of the property as the lease and right of access is a separate CGT asset to the property. This separate asset from the property was created so that you could sell the property but still have access to the grave site. As these costs were incurred to create a separate CGT asset from the property, they relate to that CGT asset for CGT purposes rather than the property and therefore cannot form part of the property's cost base. In any case, we do not consider that these costs are either fourth or fifth element costs of the property. These costs were incurred in complying with the deceased's wishes to be buried on the property rather than to increase or preserve the value of the property; or to establish, preserve or defend your title to the property or right over the property. | Detailed Reasoning - Additional information: The lease and right of access to the grave site would be a personal use asset. Consequently, if a capital loss resulted on the disposal or ending of the asset, the capital loss would be disregarded.