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Edited version of private advice
Authorisation Number: 1051932412133
Date of advice: 13 December 2021
Ruling
Subject: Legal expenses
Question 1
Are you entitled to a deduction for legal expenses incurred while defending a damages claim against you?
Answer
Yes. Section 8-1 of the Income Tax Assessment Act 1997 allows for a deduction for a loss or outgoing to the extent that it is incurred in gaining or producing your assessable income. Accordingly, you are entitled to a deduction under section 8-1 of the ITAA 1997 for legal expenses you incurred in defending damages claim on the basis that the expenses arose as a consequence of the taxpayer's income earning activities.
Question 2
Are you entitled to claim the judgment order payment as a deduction?
Answer
Yes. In your case, the plaintiff was injured visiting the property that you lease. There is a clear connection between the judgment order payment and your rental/leasing income such that the expenses are incidental and relevant to the generation of your assessable rental income, therefore these expenses are deductible under section 8-1 of the ITAA 1997.
This ruling applies for the following period:
Year ended 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You owned an income producing commercial property.
The property is leased to an unrelated entity.
A third party (the plaintiff) was injured on XXXX when she visited the Property.
You sold the Property on XXXX.
On XXXX, the third party (the plaintiff) brought a claim of negligence against you and the business renting/leasing your property.
The parties involved settled the Court Proceedings and a judgment order was issued on XXXXX stating that you agreed to pay the plaintiff $XXXX inclusive of costs, disbursements and interest and the other party was not required to pay anything, other than its own legal costs.
You paid the judgment sum on XX XXXX XX.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1