Edited version of private ruling

Authorisation Number: 1011779547520

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Ruling

Subject: Legal expenses

Question 1

Are legal fees relating to a dispute of a licensing agreement to the use of a car parking space for a rental property deductible?

Answer

No.

Question 2

Are the associated costs (searches, valuation) relating to a dispute of a licensing agreement to the use of a car parking space for a rental property deductible?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You purchased a penthouse apartment several years ago.

You should also have the use of a car parking space in the basement area.

Since approximately two years ago you have been denied access to the use of a basement car space due to a company asserting that it has a licence agreement with the owner's corporation to use the car parking spaces in the basement area.

You have issued a claim against the company to regain the use of the car parking space in the basement area and incurred legal costs.

Over the last two years you have leased the rental property at a reduced market rent due to the parking space not being available.

In the current year you have incurred commercial car parking costs in order to offer a car parking space with the rental property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Summary

Your expenses related to legal expenses and associated costs incurred as a result of your rental property are not deductible as they are capital in nature.

Detailed reasoning

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;

· relate to the earning of exempt income; or

· a provision of the ITAA 1997 prevents it.

Legal expenses fall under the definition of a general deduction. They can be characterised as an outgoing on revenue account or an outgoing of a capital nature, depending on the cause or purpose for which the legal expenses were incurred (Hallstroms Pty Ltd v. FC of T (1946) 72 CLR 634; 8 ATD 190; 3 AITR 436). The nature or character of the legal expenses follows the advantage which is sought to be gained by incurring the expenses. If the advantage to be gained is of a capital nature, rather than of a revenue nature, then the expenses incurred in gaining the advantage will also be of a capital nature.

It follows also that the character of legal expenses is not determined by the success or failure of the legal action.

Where legal expenses arise as a consequence of the day to day activities of a business, that is, they are incurred in gaining or producing assessable income, 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, that is, they relate to the profit yielding structure, the expenditure is of a capital nature and the expenses are not deductible (Sun Newspapers Ltd v FC of T (1938) 61 CLR 337; ATD 87; (1938) 1 AITR 403).

In Broken Hill Theatres Pty Ltd v. FC of T (1952) 85 CLR 423; 9 ATD 306 it was held that expenses incurred in opposing the granting of a licence to a competitor which would have seen a reduction in the taxpayer's income were capital costs. Similarly, the expenses you incurred in regaining the car parking space can be attributed to the preservation of your income earning structure and are thus non-deductible capital costs.

Our website lists examples of expenses that are capital in nature when claiming legal expenses associated with rental properties:

Capital expenses include:

· conveyancing costs paid to a conveyancer or solicitor

· title search fees, and

· valuation fees.

In your case, you incurred legal expenses so that you could regain the use of a car parking space at your rental property. The car parking space is considered to be a part of a profit yielding structure. Consequently, it is considered to be a capital item. Therefore, as the legal expenses were incurred in relation to a capital item they will also be of a capital nature and are not deductible. Additionally, the associated costs related to searches and valuation are not deductible as they are deemed to be capital in nature.

Other information

Although your legal expenses are not deductible, they may be included in the cost base of your rental property for the purposes of capital gains tax and are used to calculate the capital gain or loss arising on disposal of the property. Subsection 110-25(6) of the ITAA 1997 explains that capital expenditure incurred to preserve or defend your title to an asset, or your right over an asset, can be included in the cost base of that asset. Also, under paragraph 110-25(5)(a) of the ITAA 1997, the cost base includes capital expenditure you incurred, the purpose or the expected effect of which, is to increase or preserve the asset's value.