Draft Taxation Determination

TD 93/D120

Income tax: if a lessee incurs legal expenses defending a lessor's attempts to terminate the lease, are these legal expenses an allowable deduction under subsection 51(1) of the Income Tax Assessment Act 1936?

• Please note that the PDF version is the authorised version of this draft ruling.
  This document has been finalised by TD 93/141.

FOI status:

Preamble

1. No. The legal expenses are of a capital nature and are not deductible under subsection 51(1).

2. They are not incurred by the lessee in the course of gaining or producing assessable income or carrying on a business for that purpose, but are incurred for the purpose of securing the lessee's right to possession of the asset that is being leased.

3. However, the first $50 of the legal expenses will be allowable under section 64A if they fall within the definition of legal expenses in that section.

Example

Z leases business premises from ABC P/L. ABC P/L serves notice to terminate the lease.

Z incurs legal costs of $1250 engaging a solicitor to defend the action. The $1250 is not allowable under subsection 51(1) as these expenses are of a capital nature. However, the first $50 is allowable as a deduction under section 64A.

Commissioner of Taxation
20 May 1993

References

BO NEWTD35

Subject References:
leases
legal expenses
termination of lease

Legislative References:
ITAA 51(1)
ITAA 64A