Private ruling: Capital gains tax - cost base elements
Date of advice: 26 March 2020
Published: May 2020
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the portion of the fees charged by the Trustee that relates to the cost of owning the non-income producing main residence of the testatrix, considered to be capital gains tax (CGT) asset cost base expenditure under subsection 110-25(4) of the Income tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Is the portion of the fees charged by the Trustee that relates to the cost of owning the farm property, to the extent that it cannot be deducted, considered to be CGT asset cost base expenditure under subsection 110-25(4) of the ITAA 1997? | A2: Yes

Relevant facts and circumstances: The deceased passed away. A professional Trustee company was appointed as Executor and Trustee of an ongoing Testamentary Trust formed under her Will. The terms of the Will required the Trustee to the hold the farm property and the deceased's former main residence residential property in accordance with the Deed until the Final Date. The Deed defines the Final Date as being the date upon which the last living grandchild of the Testatrix obtained 18 years of age, which occurred in 20XX. The Trustee was to then sell the Final Assets and distribute the balance to the residuary beneficiaries. The properties were sold in the 20XX tax year by the Trustee, with the residual beneficiaries presently entitled on the resulting net capital gain. No beneficiary could be presently entitled prior to the Final Date. The Trustee charged fees under Chapter 5D Licenced Trustee Companies of the Corporations Act 2001 (as amended) and in accordance with the terms of the Financial Services Guide of the Trustee company as constituted at that time. The Trustee's fee was calculated as a percentage on the gross value of the Delayed Assets, charged against the capital of the Testamentary Trust. The former main residence was vacant throughout the life of the Trust. It was not situated on the farm property, nor was it adjacent to this property. The residence on the farm property was occupied rent free by a residuary beneficiary who acted as a caretaker. This residence on occasions was also leased as short-term farm stay accommodation. Further, some income was realised from the sale of the remaining cattle on the farm. The income received from the caretaker's activities were declared as assessable income of the Trust. The Trust did not meet costs in its own right against these income activities and no allowable deductions were claimed by the Trust. The Trust did meet certain ownership costs in relation to the farm property outside of the income activities to maintain, manage and protect the value of the property as required by a trustee. The trustee has deemed these to be capital in nature from a trust perspective including maintenance of the property, fencing, insurance, council rates, smoke alarms, electricity etc.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 110-25(1) | Income Tax Assessment Act 1997 Subsection 110-25(4) | Income Tax Assessment Act 1997 Subsection 110-45(1B)

Reasons for decision: Summary: Where an expense relates to a CGT asset and can't be claimed as a deduction, it may be able to be included as part of the cost base of the CGT asset. The cost baseof a CGT asset to a taxpayer consist of five elements ( subsection 110-25(3) of the ITAA 1997 ). These elements are: · Acquisition costs. · Incidental costs. · Costs of ownership. · Capital expenditure to increase or preserve the asset's value. · Capital expenditure to establish, preserve or defend title to the asset or a right over the asset. Subsection 110-25(4) of the ITAA 1997 states that the third element of the cost base of a CGT asset is the costs of owning the CGT asset but only if the CGT asset was acquired after 20 August 1991. It also states that these costs include: · interest on money you borrowed to acquire the asset · costs of maintaining, repairing or insuring it · rates or land tax, if the asset is land · interest on money you borrowed to refinance the money you borrowed to acquire the asset · interest on money you borrowed to finance the capital expenditure you incurred to increase the asset's value. However, expenditure on assets acquired after 7:30 pm on 13 May 1997 does not form part of the third element of the cost base to the extent that they have been deducted or can be deducted (subsection 110-45(1B) of the ITAA 1997). | Detailed Reasoning - In your case: The Trustee charged fees for the management of the trust estate that included both the main residence property and the farm property. It is the Commissioner's view that fees charged by the Trustee relating directly to administering the 'cost of owning' expenditure for the property can be included in the cost base of the CGT asset under the third element (subsection 110-25(4) of the ITAA 1997). The Trustee's fees relating to this element will need to be apportioned on a reasonable basis and reduced by any amounts that were deducted or can be deducted (as per below). | Detailed Reasoning - Farm property: As the farm property was used to produce assessable income, the Trustee's fees relating to the third element of the cost base, will need to be reduced by any amount that can be deducted against the income earning activity. Taxation Determination TD 2005/47 Income tax: what do the words 'can deduct' mean in the context of those provisions in Division 110 of the Income Tax Assessment Act 1997 which reduce the cost base or reduced cost base of a CGT asset by amounts you 'have deducted or can deduct', and is there a fixed point in time when this must be determined? is relevant. It states that you 'can deduct' an amount for the purposes of a provision in Division 110 of the ITAA 1997 at a particular time if the terms of the relevant deduction provision have been satisfied in respect of the amount and the deduction is not prevented by the expiry of the applicable amendment period. | Detailed Reasoning - Main residence property: As the former main residence property was not income producing, the Trustee's management fees for this property were not deductible to the Trust and no reduction of the cost base expenditure in relation to the 'cost of ownership' Trustee management fees is required.