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ATO Interpretative Decision

ATO ID 2002/923 (Withdrawn)

Income Tax

Deductibility of legal expenses - public liability insurance for rental property
FOI status: may be released
  • This ATO ID is withdrawn as the ATO View on the relevant issue is contained in ATO ID 2003/145 and 2003/801.
    This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

Are the taxpayer's legal expenses, in seeking its insurer pay damages, deductible under section 8-1 of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Decision

No. The taxpayer's legal expenses are not deductible under section 8-1 of the ITAA 1997.

Facts

The taxpayer, a company with a single shareholder and director, owned a house. The taxpayer rented the house to a relative of the director.

The oral rental agreement required the tenant to mow the grass surrounding the house.

The director mowed the grass on one occasion because the tenant's mower was broken. Whilst doing this, a person visiting the tenant was injured.

The injured person started a damages action against the director. The taxpayer incurred legal fees in seeking its insurer pay any damages.

A settlement was reached.

Reasons for Decision

So far as is relevant here, section 8-1 of the ITAA 1997 allows a deduction for an outgoing to the extent that it is incurred in gaining or producing assessable income. However, to the extent an outgoing is of a private nature, it is not deductible.

Expenditure by a company to defend a director against legal proceedings may be deductible (Magna Alloys & Research Pty Ltd v FCT 80 ATC 4542; (1980) 11 ATR 276). However in this case, there is an insufficient connection between the legal fees and the rental income as:

•
The rental agreement does not require the taxpayer to mow the lawn; indeed the tenant was required to do this.
•
The taxpayer's reason for mowing the lawn, because the tenant's mower was broken, does not show a connection with gaining income.
•
The director and the tenant are relatives.
•
The director is the sole director and shareholder of the company.

Date of decision:  20 September 2002

Year of income:  Year ended 30 June 2002 Year ended 30 June 2001

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

Case References:
Magna Alloys & Research Pty Ltd v FCT
   80 ATC 4542
   (1980) 11 ATR 276

Keywords
Rental property income
Deductions & expenses
Legal expenses
Rental property
Landlord & tenant

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  26 September 2002

ISSN: 1445-2782

history
  Date: Version:
  20 September 2002 Original statement
You are here 20 January 2006 Archived

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