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Edited version of your written advice
Authorisation Number: 1012810121390
Ruling
Subject: Deduction for legal expenses
Question
Are you entitled to claim a deduction for legal fees to review a building contract?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2015
The scheme commenced on
1 July 2014
Relevant facts
You purchased a home and land package to use as a rental property on completion of the dwelling.
You were told by the builder that the finalisation of the construction would be outside what you understood was to be the expected completion date.
You did not agree with the builder's interpretation of the contract and you engaged a solicitor to advise you on the matter.
You incurred costs to engage the solicitor.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 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, or relate to the earning of exempt income.
In determining whether a deduction for legal expenses is allowed under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered (Hallstroms Pty Ltd v. FC of Taxation (1946) 72 CLR 634; (1946) 3 AITR 436; (1946) 8 ATD 190). The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses. If the advantage to be gained is of a capital nature, then the expenses incurred in gaining the advantage will also be of a capital nature.
The courts have also considered what constitutes a capital outgoing. In Sun Newspapers Ltd v. FC of T (1961) 61 CLR 337; 5 ATD 87; (1938) 1 AITR 403 Dixon J stated that:
expenditure and outlay upon establishing, replacing and enlarging the profit yielding subject may in a general way appear to be of a nature entirely different from the continual flow of working expenses which are or ought to be supplied continually out of the returns or revenue.
The costs associated with the purchase of a rental property are generally not deductible as they form part of establishing the profit making asset.
In your case, you incurred legal expenses to resolve a dispute you had with the builder who was in the process of constructing your rental property. You intend to rent the property when the house is completed.
The cost incurred for obtaining legal advice about the building contract is about establishing the capital asset and is by its nature a capital expense and is therefore not an allowable deduction.