Tax and SARS knowledge base
Legal title-defence costs in CGT base cost
Can legal costs of defending ownership be included in a company's CGT base cost?
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Direct answer
Potentially. SARS's CGT base-cost guidance includes capital costs actually incurred in establishing, maintaining or defending title or a right to an asset. SARS gives legal costs actually incurred in a court dispute relating to maintaining ownership of an asset as an example.
The cost must still satisfy the base-cost conditions. It should be linked to the asset and title or right in question, actually incurred, and not be allowable as a deduction from income. A legal invoice is not automatically a base-cost item simply because it mentions a company asset.
What this means in practice
The correct starting point is the purpose of the legal work. Was the work directed at obtaining, maintaining or defending title or a right to the asset? Or was it directed at routine commercial operations, an income dispute, debt collection, a repair contract, a lease issue or another matter? The invoice narrative, engagement letter, pleadings and outcome should be reviewed together.
SARS explains that base cost is used to compare against proceeds when determining a capital gain or loss. For assets acquired on or after 1 October 2001, it generally includes qualifying acquisition and improvement costs. SARS also says costs included in base cost are those actually incurred in acquiring, enhancing or disposing of an asset that are not allowable as income deductions.
This creates a double-counting control. A company should not simply capitalise a legal bill for accounting purposes and then assume it belongs in the CGT schedule. It must check its income-tax treatment, asset records and the factual purpose of the work.
Step-by-step
- Identify the asset and right.
Name the asset precisely: for example, a property, shares, intellectual property or a contractual right. Record legal ownership, acquisition date, asset register reference and the title or right that was disputed.
- Read the legal documentation.
Keep the engagement letter, invoices, pleadings, correspondence, settlement documents and proof of payment. Identify the portion of the work that relates to establishing, maintaining or defending title. If one invoice covers more than one matter, seek a reasonable documented breakdown from the adviser.
- Test against the base-cost conditions.
SARS's guidance lists title-defence capital costs as a base-cost item, but the expenditure must be actually incurred and must not be allowable as a deduction from income. Record the conclusion and the supporting documents in the tax workpapers.
- Separate current and capital items.
SARS says current costs such as interest, repairs, insurance and rates and taxes are normally not base cost. Apply the same disciplined separation to legal work. The fact that litigation is expensive does not turn routine operating legal costs into capital costs.
- Update the asset schedule.
Add only the supported qualifying amount to the base-cost schedule. Link it to the source invoice and payment. Preserve the schedule until the asset is disposed of and beyond, in line with record-retention obligations.
- Recheck at disposal.
When the asset is sold or otherwise disposed of, reconcile the CGT calculation to the preserved records. Seek advice if there is a prior valuation-date issue, related-party transaction, settlement allocation or doubt about whether an amount is allowable as a deduction from income.
Documents and records to keep
Keep the asset acquisition file, register, legal mandate, invoices, court or dispute papers, settlement documents, payment evidence and tax calculation. Prepare a clear audit trail from the invoice to the asset and from the asset schedule to the disposal calculation.
Important limits and exceptions
Not every legal cost qualifies. SARS's example concerns legal costs actually incurred in a court dispute relating to maintaining ownership. The facts can be different where work involves operating income, a lease, a commercial contract, a shareholder dispute or multiple assets. Do not add an amount that is allowable as a deduction from income.
This article does not calculate the capital gain, deal with an asset held before 1 October 2001 or decide whether a particular settlement payment is capital.
When to get tailored advice
Get tax and legal advice where litigation is mixed-purpose, the cost is large, an invoice covers several matters, the asset was acquired before the CGT valuation date, or the disposal is imminent. Advice is also appropriate where prior deductions may have been claimed.
TaxProof can help organise the evidence and maintain a base-cost schedule. We cannot determine the tax character of a contested legal cost or provide litigation advice.