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Edited version of your written advice
Authorisation Number: 1012834378662
Date of advice: 7 July 2015
Ruling
Subject: CGT - other - legal and demolition costs
Question 1
Are the demolition expenses of a revenue nature?
Answer
No
Question 2
Are the demolition expenses of a capital nature?
Answer
Yes
Question 3
Are the legal fees incurred of a revenue nature?
Answer
No
Question 4
Are the legal fees incurred of a capital nature?
Answer
Yes
This ruling applies for the following period
Year ended 30 June 2014
The scheme commences on
1 July 2013
Relevant facts and circumstances
You acquired the property prior to 20 September 1985.
The property has been rented since it was acquired.
The property has never been your main residence.
A real estate agent was engaged to look after tenancy matters.
The last tenant operated outside the tenancy agreement and sublet the property.
The dwelling was destroyed and the insurance company denied the payout due to a difference between the properties actual use compared to its insured use.
You incurred legal fees in an attempt to obtain payment from the insurance company and the tenant in relation to the loss of the dwelling, without success.
You received notice from the council compelling you to remove the destroyed dwelling (structure) as it was a safety hazard. You incurred costs in relation to the demolition and clean-up of the structure.
You have no intention of constructing a new dwelling on the now vacant land.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1
Reasons for decision
Broadly, 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, or relate to the earning of exempt income.
Deductibility of demolition expenses
The demolition costs were not incurred in gaining or producing assessable income and therefore would not be an allowable deduction under section 8-1 of the ITAA 1997. The expenditure was incurred in the removal and clean-up of the remaining structure of your dwelling after it was destroyed by fire. The cost is considered to be of a capital nature.
Deductibility of legal expenses
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. Federal Commissioner 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 which is sought to be gained by incurring the expenses.
If the advantage to be gained is of a revenue nature, then the expenses incurred in gaining the advantage will also be of a revenue nature. In the same way, 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. It follows also that the character of legal expenses is not determined by the success or failure of the legal action.
In your case, you incurred the legal expenses pursuing payment for the loss of a capital asset and therefore the expenditure would be of a capital nature.