Edited version of private advice

Authorisation Number: 1051640036892

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This edited version has been found to be misleading or incorrect. It does not represent the ATO's view of the relevant law.

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Date of advice: 27 February 2020

Ruling

Subject: Cost base expenses

Question

Are the legal expenses incurred for defending car park rights relating to a rental property an allowable deduction?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

4 July 20XX

Relevant facts and circumstances

You and your partner purchased a property in the some years ago.

The body corporate by-laws permit you to have exclusive use of common property parking spaces

The Owners Corporation made an application seeking orders repeal the relevant by-laws.

The property tenancy included a designated car space

You would be forced to reduce the rent charged for the property if the car park right was removed

A total of X owners were affected by the removal of this right

Some owners, including yourself and your partner engaged solicitors in order to defend your right in the 20XX, 20XX and 20XX income years

The group incurred legal expenses which were apportioned between those parties involved in proceedings.

You and your partner were responsible for your share of these costs

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 subsection 110-25(6)

Income Tax Assessment Act 1997 section 110-35(1)

Reasons for decision

Summary

As the owner of a property used to produce assessable income, legal fees incurred in taking action to defend your right over an asset are an allowable deduction under subsection 110-25(6) of the Income Tax Assessment Act 1997 (ITAA 1997). This deduction will form part of the cost base of your asset for the purpose of determining any capital gains or losses when the asset is sold.

Detailed reasoning

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for a loss or an outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature.

In determining whether a deduction is allowed under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered (Hallstroms Pty Ltd v FC of T (1946) 72 CLR 634; 8 ATD 190 per Dixon J). The nature or character of the legal expenses follows the advantage which is sought to be gained by incurring the expenses.

Where the legal expenses arise as a consequence of the day to day activities of a business, the object of the expenditure is devoted towards a revenue end and the legal expenses are deductible (Herald & Weekly Times v FC of T 48 CLR 113; 2 ATD 169). Where, however, the expenditure is devoted towards a structural rather than operational purpose, the expenditure is of a capital nature and the expenses are not deductible (Sun Newspapers Ltd v FC of T (1938) 61 CLR 337; 5 ATD 87).

Under section 110-35(1) of the Income Tax Assessment Act 1997 (ITAA 1997) there are a number of incidental costs you may have incurred that are eligible to reduce your cost base. They are costs you may have incurred:

(a) to acquire a CGT asset; or

(b) that relate to a CGT event.

Capital expenditure incurred by a taxpayer to establish, preserve or defend their title to an asset, or a right over an asset forms the fifth element of the cost base of the asset under subsection 110-25(6) of the ITAA 1997.

As stated in Cooper, GS 1992, Capital gains tax, 2nd edn, Butterworths, Sydney, p. 87:

Defending the taxpayer's title or right seems to refer to action taken when the title or right is put in dispute. The most obvious example of this is where someone else lays a claim to the asset in whole or in part and institutes legal proceedings to establish that claim. Costs of the taxpayer in defending those proceedings would be costs in defending the taxpayer's title.

In your case, you purchased a property in 20XX with your partner which included exclusive use of common property car spaces. You tenanted this property with the inclusion of the car space due to the entitlement identified in the Strata Schemes Management Act 2015 (SSMA) by-laws.

Your entitlement to this parking was challenged due to the Owners Corporation applying to amend the by-laws. Amendment of these by-laws would have resulted in reducing your rental income.

Between the 20XX and 20XX income years, you were responsible for paying your portion of legal expenses. As this expense was incurred by you to preserve your right over an asset, it forms part of the cost base of your asset when the asset is sold pursuant to subsection 110-25(6) of the ITAA 1997.