ATO Interpretative Decision
ATO ID 2002/315 (Withdrawn)
Income TaxDeduction - Legal expenses incurred in taking court action for loss of rental income
FOI status: may be released
This ATO ID is withdrawn because it is a straight application of the law and does not contain an interpretative decision.This document has changed over time. View its history.
Status of this decision: Decision Withdrawn 30 January 2015
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for legal expenses incurred for unsuccessful legal action taken to recover lost rental income?
Yes. A taxpayer is entitled to claim a deduction under section 8-1 of the ITAA 1997 for legal expenses incurred for unsuccessful legal action to recover lost rental income.
The taxpayer has a rental property. The property was unable to be leased for a substantial period due to the actions of a third party.
The taxpayer took legal action against the third party to recover lost rental income.
The taxpayer was unsuccessful and was ordered by the court to pay the legal costs of the other party as well as their own costs.
Reasons for Decision
Section 8-1 of the ITAA 1997 states that you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing assessable income and is not:
- Capital, private or domestic in nature
- Incurred in gaining or producing exempt income, or
- Prohibited by a section of the ITAA 1997 or the Income Tax Assessment Act 1936.
Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.
Income from rental property is considered ordinary income.
The nature or character of legal expenses follows the advantage which was sought to be gained by incurring the legal expenses (Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation ( 1946) 72 CLR 634).
The taxpayer was seeking to recover lost rental income. The nature of the advantage sought by the taxpayer was to gain assessable income. Thus, any compensation received in respect of the lost income would be income under ordinary concepts and included in the taxpayer's assessable income under subsection 6-5(2) of the ITAA 1997.
Accordingly, the taxpayer incurred legal expenses for the purposes of gaining or producing assessable income. The taxpayer may claim a deduction for the expenses under section 8-1 of the ITAA 1997.Date of decision: 5 March 2002 Income Tax Assessment Act 1936
Income Tax Assessment Act 1936