| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your written advice
Authorisation Number: 1051313095749
Date of advice: 27 November 2017
Ruling
Subject: Rental deductions – legal expenses
Question 1
Are you entitled to a deduction for the legal expenses you incurred in disputing your conviction associated with your rental property?
Answer
Yes.
Question 2
Are you entitled to claim a deduction for the costs calculated on your hourly rate from your normal workplace?
Answer
No
This ruling applies for the following period
Year ended 30 June xxxx
The scheme commenced on
1 July xxxx
Relevant facts
You jointly own a rental property.
Your property manager provided the tenant with a Form 9 Notice advising that you would be attending the property to conduct the repairs.
You went to the rental property with a tradesman at a reasonable time to undertake some repairs that had been reported by the tenant.
The tenant advised you to leave the property and they phoned the police.
After approximately 20 mins you left the property.
You went court for the offence.
The presiding Magistrate declared you guilty.
You engaged solicitors.
The Relevant Court judge quashed your conviction.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1
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.
The courts on a number of occasions have determined legal expenses to be an allowable deduction if the expenses arise out of the day to day activities of the taxpayers business. The legal action must have more than a peripheral connection to the taxpayer’s income producing activities (Magna Alloys and Research Pty Ltd v FC of T (1980) 49 FLR; (1980) 11 ATR 276; 80 ATC 4542).
Legal expenses can be characterised as an outgoing on revenue account or an outgoing of a capital nature depending on the purpose for which the legal expenses were incurred (Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 8 ATD 190; (1946) 3 AITR 436). Where the legal expenses arise as a consequence of the taxpayer’s income earning activities, and the object of the expenditure is devoted towards a revenue purpose, the legal expenses are deductible.
ATO Interpretive Decision ATOID 2002/1027 states that:
The cost of repairs, as distinct from improvements, to an investment property are accepted as being on revenue account as they are incidental and relevant to the income earning activities as a landlord. Legal action taken by a landlord to recover the cost of those repairs would also be accepted as being on revenue account for the same reason.
Lawyer’s fees, travel costs of witness and cost of Transcripts
In your case, you incurred legal expenses as a direct result of attempting to carry out repairs on your rental property. There is a clear connection between the assessable income and the expense.
It follows that you are able to claim those costs directly connected with your pursuit of that income, being the lawyer’s fees, as well as the relevant travel costs of your witness and the cost of the Transcripts for use in your appeal.
Replacement of wages
Page four of the Australian Taxation Office Guide for Rental Property owners – rental properties 2017 advises that associated payments include all amounts you receive or become entitled to, as part of the normal, repetitive and recurrent activities through which you intend to generate profit from the use of your rental property.
Legal Expenses lack the necessary connection with assessable income when they relate to:
● Positions you hold from which you do not derive assessable income
● Legal services that may or may not relate to your income earning activities
● Legal expenses of a private or domestic nature
Legal expenses of a private nature are incurred for the personal benefit of you, your family or other persons.
Your claim for the period you had to leave your working places to attend the court are not sufficiently related to the normal, repetitive and recurrent activities through which you intend to generate profit from the use of your rental property. Therefore, these expenses are not deductible.
Additional Information
You incur an expense in an income year when:
● You receive a bill or invoice for an expense that you are liable for and must pay (even if you don’t pay it until after the end of the income year).
● You do not receive a bill or invoice but you are charged and you pay for the expense.
ATO view documents
ATO Interpretive Decision ATOID 2002/1027
Rental Properties 2017
Taxation Ruling TR 97/7
Other references (non ATO view, such as court cases)
Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 8 ATD 190; (1946) 3 AITR 436
Magna Alloys and Research Pty Ltd v FC of T (1980) 49 FLR; (1980) 11 ATR 276; 80 ATC 4542
Copyright notice
© Australian Taxation Office for the Commonwealth of Australia
You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).
