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Edited version of your written advice
Authorisation Number: 1012861538109
Date of advice: 18 August 2015
Ruling
Subject: Legal expenses
Question:
Will the legal expenses you incurred in relation to your rental property form part of your cost base for capital gains tax purposes?
Answer:
Yes
This ruling applies for the following periods:
Year ending 30 June 2016
Year ending 30 June 2017
Year ending 30 June 2018
Year ending 30 June 2019
Year ending 30 June 2020
Year ending 30 June 2021
Year ending 30 June 2022
Year ending 30 June 2023
Year ending 30 June 2024
This scheme commenced on:
1 July 2015
Relevant facts:
You own a tenanted residential property.
The property has been rented for a long time.
You and a neighbour have a dispute over the location of a boundary fence between your properties.
You engaged a solicitor to resolve the dispute.
You will not be reimbursed for your legal expenses.
Relevant legislative provision
Income Tax Assessment Act 1997 subsection 110-25(6).
Reasons for Decision
The courts have determined that the nature or character of legal expenses follows the advantage which is sought to be gained by incurring the expenses (Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; 8 ATD 190; 3 AITR 436 per Dixon J).
Where legal expenses are devoted towards a structural rather than an operational purpose, the expenditure is of a capital nature and the expenses are not deductible (Sun Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; 5 ATD 87; (1938) 1 AITR 403).
In addition, outgoings incurred in the preservation of an existing capital asset have been held to be capital in nature (John Fairfax & Sons Pty Limited v. Federal Commissioner of Taxation (1959) 101 CLR 30; (1959) 7 AITR 346; (1959) 11 ATD 510).
In your case, you intend incurring legal expenses to resolve a dispute in relation to a boundary fence between your property and a neighbouring property.
The legal expenses that you will incur are capital in nature as they relate to the asset from which income is earned rather than to part of the income-earning process.
Subsection 110-25(6) of the Income tax Assessment Act 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. The legal expenses that you incurred can be said to meet this description. As such, your legal expenses form part of the cost base of your rental property.