| Disclaimer This edited version has been archived due to the length of time since original publication.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 private ruling
Authorisation Number: 1012539442227
Ruling
Subject: Rental property expenses
Question
Are you entitled to a deduction for legal expenses and building expert reports incurred in rectifying damages to your rental property?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2011
Year ended 30 June 2012
Year ended 30 June 2013
The scheme commences on:
1 July 2010
Relevant facts and circumstances
You have a rental property which has been rented since the 200X financial year.
You were notified by the local city council that they would be carrying out stormwater drainage augmentation works along your property.
The property was damaged during these works. The property was previously in good condition.
You are seeking rectification of the damages. The matter is currently in court proceedings and waiting for judgement.
You have incurred expenses in obtaining building expert reports and legal fees.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1 and
Income Tax Assessment Act 1997 Section 25-10.
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.
Legal expenses 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). Where the legal expenses arise as a consequence of the day to day activities of a business, and the object of the expenditure is devoted to a revenue purpose, the legal expenses are deductible (Herald and Weekly Times Ltd v. Federal Commissioner of Taxation (1932) 48 CLR 113; 2 ATD 169).
The cost of obtaining a defective building works report is viewed as being in the nature of a legal expense.
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.
In your case, the cost of obtaining the building expert reports and the legal expenses were incurred as a result of damages based on revenue account (cost of covering repairs). Therefore, the expenditure is related to gaining or producing assessable income and is not considered to be private or capital in nature. Accordingly, you are entitled to deductions for the building expert reports and the legal expenses incurred in rectifying the damage caused to your rental property.