Private ruling: Capital gains tax – cost base – fifth element – legal fees
Date of advice: 10 April 2018
Published: June 2018
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Can the legal fees incurred to defend and preserve ownership of the property be included as part of the cost base of this property for future capital gains tax purposes? | A1: Yes

Relevant facts and circumstances: You incurred legal costs in defending your ownership of the property. The legal costs were incurred in connection with securing an enduring benefit which is to retain ownership of the property. You purchased the property prior to your marriage. You rented the property to the same tenant continuously for the majority of your ownership period. You and your spouse signed a financial agreement wherein the property was listed as separate property, being yours solely. You and your spouse separated. Your spouse sought orders from the Court for a declaration that the property was partly held in trust for them (beneficial and equitable interest) and to be considered as shared property. Your spouse further sought orders for the property to be transferred to them. Your spouse moved into the property pending proceedings with the Court. The divorce was granted. You were successful in defending ownership of the property. Your spouse vacated the property.

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 incurred 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. In your case you incurred legal fees in defending your ownership of the property. The legal fees were incurred in connection with securing an enduring (lasting) benefit which is to retain ownership of the property. If you had not taken the action to defend yourself the court may have allowed the claim and your interest in the property may have been transferred to your spouse. 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 (or reduced cost base) in respect of the property.