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Edited version of private advice
Authorisation Number: 1051639597035
Date of advice: 17 March 2020
Ruling
Subject: Legal expenses
Question
Are the legal expenses incurred in relation to a damages claim for your rental property deductible?
Answer
Yes. It is accepted that the legal expenses incurred are in connection with your income producing activities. The expenses are not of a capital, private or domestic nature.
Question 2
Are you entitled to claim the compensation settlement payment as a deduction?
Answer
Yes
This ruling applies for the following periods:
Year ended 30 June 2018
Year ended 30 June 2019
Year ended 30 June 2020
The scheme commences on:
1 July 2017
Relevant facts and circumstances
You own an investment property, (the property).
The owner of the neighbouring property lodged an application with an Administrative Tribunal to seek compensation for damages.
It was alleged that the water came from the property into the neighbouring property causing damages that required repairing.
You engaged legal representation to defend the above claims.
The matter was settled on the XXXX.
The final payment was made to your legal representation on the XXXX.
You have contacted body corporate and your land lord insurance company and it has been confirmed, no claim is possible to be made to cover the damages, legal expenses and other associated costs with the settlement.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1
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 that 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.
Expenses that are 'incidental and relevant' to the taxpayer's income earning activities are considered to be sufficiently connected with the derivation of assessable income and therefore will be an allowable deduction under section 8-1 of the ITAA 1997 (Ronpibon Tin NL & Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431).
In your case, the water damage caused to the neighbouring property occurred while your property was earning assessable rental income. Therefore the expense to compensate for the damage is accepted as being incidental and relevant to your income earning activities.