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Edited version of your written advice
Authorisation Number: 1051505515036
Date of advice: 11 April 2019
Ruling
Subject: Expenses incurred in defending damages claims, relating to a residential rental property.
Question 1
Are you entitled to a deduction for legal expenses incurred in seeking advice and representation for a compensation case relating to the occupancy of your residential rental property?
Answer
Yes
Question 2
Are you entitled to claim a deduction for the amount of a settlement sum, paid to a tenant in compensation for damages incurred whilst living in your residential rental property?
Answer
Yes
Section 8-1 of the ITAA 1997 allows a deduction for all expenses 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.
You have incurred the expenses in your capacity as landlords of the rental property. The expenses arose out of the letting of the premises to a tenant for the purposes of producing assessable income. There is a clear connection between their legal expenses and their rental income such that the expenses are incidental and relevant to the generation of their assessable rental income. There was no enduring benefit produced by the expenditure and therefore it is appropriate to treat the expense as being on revenue account.
Therefore, you are entitled to a deduction under section 8-1 of the ITAA 1997 for the expenses incurred in defending the damages claim.
This ruling applies for the following periods:
Year ended 30 June 201Y
Year ended 30 June 201Z
The scheme commences on:
16 December 201X
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
● You own a residential rental property.
● You employ a real estate agency to manage the property.
● You obtained a tenancy agreement for the property from late 201X to late 201Y.
● The tenants lodged complaints in early 201Y.
● The tenants moved out of the property on early 201Y.
● The lease was terminated in early 201Y.
● The tenants sued you for compensation from mid-201Y to mid-201Z.
● You paid the tenants a settlement sum in mid-201Z.
● You incurred legal expenses.
● You obtained landlord insurance and you were not insured for mould damage.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1