ATO Interpretative Decision

ATO ID 2002/185 (Withdrawn)

Income Tax

Deductibility 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  • This ATO ID is withdrawn as the ATO View on this issue is contained in the Rental Properties Guide
    This document has changed over time. View its history.

Status of this decision: Decision Withdrawn 20 January 2006
CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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.

Issue

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)?

Decision

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.

Facts

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

Legislative References:
Income Tax Assessment Act 1997
   section 8-1

Case References:
Hallstroms Pty Ltd v. Federal Commissioner of Taxation
   72CLR634
   8ATD190
   3 AITR 436

Herald & Weekly Times v. Federal Commissioner of Taxation
   48 CLR 113
   2 ATD 169

Sun Newspapers Ltd v. FC of T
   61 CLR 337
   5 ATD 87
   (1938) 1 AITR 403

Keywords
Deductions
Legal expenses
Rental Property

Business Line:  Small Business/Individual Taxpayers

Date of publication:  28 February 2002

ISSN: 1445-2782

history
  Date: Version:
  16 October 2001 Original statement
You are here 20 January 2006 Withdrawn