Preamble
Yes. Under paragraph 110-35(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) [1] , a cost can relate to a CGT event even if you incur it after the CGT event happens.
Luke sells his business on 1 January 2016. Under the contract of sale, Luke receives $5,000 for the goodwill of the business. A few months later, he is sued by the purchaser for misrepresenting the value of the goodwill. Luke incurs legal fees of $1,000 to defend the action. The legal fees of $1,000 are an incidental cost of Luke's CGT asset because the fees relate to the disposal of his goodwill.
This Determination applies to income years commencing both before and after its date of issue. However, this Determination will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of this Determination (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10).
Appendix 1 - Explanation
Incidental costs are the second element of the cost base of a CGT asset. [2] Incidental costs alone are also used to determine the capital loss or capital gain made from some CGT events where the rules about cost base are not relevant. [3]
There are ten types of costs set out in section 110-35. [4] A cost must fall into at least one of those types before it can qualify as an incidental cost.
For these costs (except for one type dealing with intra-group transactions) [5] , a requirement is that you have incurred the cost: • to acquire a CGT asset (paragraph 110-35(1)(a)), or • it relates to a CGT event (paragraph 110-35(1)(b)).
The expression 'relate to' is construed broadly. [6] Therefore, your costs that relate to a CGT event for the purposes of paragraph 110-35(1)(b) may include incidental costs even if you incurred them after the CGT event happens.