ATO Interpretative Decision
ATO ID 2002/185 (Withdrawn)
Income TaxDeductibility of legal expenses - to assert title over a rental property
FOI status: may be released
This ATO ID is withdrawn as the ATO View on this issue is contained in the Rental Properties GuideThis document has changed over time. View its history.
Status of this decision: Decision Withdrawn 20 January 2006
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Is a taxpayer entitled to a deduction for legal expenses incurred in asserting title to a rental property under section 8-1 of the Income Tax Assessment Act (ITAA 1997)?
No. The taxpayer is not entitled to a deduction for legal expenses incurred in asserting title to a rental property under section 8-1 of the ITAA 1997.
The will of a deceased person nominated the taxpayer as a beneficiary to inherit property.
Ownership in the property passed from the estate to the taxpayer.
The taxpayer derived assessable income from the property in the form of rents.
The taxpayer's ownership of the property was contested by a relative of the deceased person.
The taxpayer as beneficiary in the deceased estate:
- engaged legal representation to assert title to the inherited property; and
- incurred legal expenses to defend the action from a relative.
Reasons for Decision
Section 8-1 of ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature.
In determining whether a deduction is allowable under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered (Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; 8 ATD 190; 3 AITR 436 per Dixon J). The nature or character of the legal expenses follows the advantage which is sought to be gained by incurring the expenses.
Where legal expenses arise as a consequence of the day to day activities of a business, the object of the expenditure is devoted towards a revenue end and the legal expenses are deductible (Herald & Weekly Times v. Federal Commissioner of Taxation (1932) 48 CLR 113; 2 ATD 169). However, where the expenditure is devoted towards a structural rather than an operational purpose, the expenditure is of a capital nature and the expenses are not deductible (Sun Newspapers Ltd v. FC of T (1938) 61 CLR 337; 5 ATD 87; (1938) 1 AITR 403).
The taxpayer incurred legal expenses to assert title to an investment property rather than for the purposes of the operation of the rental property. Accordingly, the legal expenses are of a capital nature and are not deductible under section 8-1 of the ITAA 1997.Date of decision: 16 October 2001
Year of income: Year ended 30 June 2001
Income Tax Assessment Act 1997
Hallstroms Pty Ltd v. Federal Commissioner of Taxation
3 AITR 436
48 CLR 113
2 ATD 169 Sun Newspapers Ltd v. FC of T
61 CLR 337
5 ATD 87
(1938) 1 AITR 403