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Edited version of private ruling
Authorisation Number: 1011533517793
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Ruling
Subject: Legal expenses - inherited property
Questions and answers:
Can you claim an income deduction for legal fees incurred in relation to the acquisition of a rental property?
Answer: No.
Do your legal fees incurred in relation to the acquisition of a rental property form part of the capital gains tax (CGT) cost base of your rental property?
Answer: Yes.
Relevant facts and circumstances
You incurred legal expenses to contest a relative's will, which resulted in a rental property being awarded to you from the estate.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 110-25
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 (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.
Where an outgoing is of a capital nature in relation to the acquisition of a CGT asset, it will be accounted for under section 110-25 of the ITAA 1997, which includes subsection 110-25(6) for capital expenditure incurred to establish title to an asset or a right over an asset.
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 or income earning activity, 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).
In your case, you incurred legal expenses to establish title to a rental property rather than for the purposes of the operation of the rental property. Accordingly, your legal expenses are of a capital nature and are not deductible under section 8-1 of the ITAA 1997. The legal expenses will form part of the cost base of your property under section 110-25 of the ITAA 1997.
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