Edited version of private advice

Authorisation Number: 1052367304832

Date of advice: 7 March 2025

Ruling

Subject: Deductions - legal expenses

Question 1

Are you entitled to claim a deduction for legal fees under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for defending a right of the easement?

Answer 1

No.

This ruling applies for the following period:

30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are the registered owner of a property located at a specified address.

You conduct a primary production business (the Business) on the Property raising livestock and conducting private native forest harvesting since a specified year.

Without your consent your neighbour Person A built a road through your Property.

On a specified date, Person A took legal action under section 88K of the Conveyancing Act 1919 (NSW) to make the road a permanent easement for direct access to his property, which they believed to be essential for the effective use and development of land and that their land lacked direct access.

You objected to the proposed easement due to its negative impact on your business, for the following reasons:

•                     increased risk to your livestock due to public road access through the Property.

•                     boundary control issues, which could potentially lead to livestock loss.

•                     higher insurance and registration costs for you due to unregistered farm vehicles regularly used on the Property due to public access.

•                     areas that you can use for your tree felling activities will be reduced due to the risk of public injury.

You engaged Law Firm A on a specified date to oppose the permanent easement as Person A has alternative access options.

You were the defendant in the litigation.

The Supreme Court of the specified state made the following order on a specified date pursuant to imposing an easement to create a path (right of carriageway) on your land:

•         an easement was granted on your land for the benefit of Person A. In return of the creation of the easement Person A would pay you compensation of a specified amount.

•         you and Person A were ordered to provide written submissions by a specified date if no agreement on costs could be reached between you and Person A.

The Supreme Court of the specified state made the following order on a specified date pursuant to a settlement that was unable to be reached between you and Person A:

•                     settlement details supplied.

You have paid legal expenses of a specified amount for your and Person A's legal expenses. You have provided details of the legal expenses.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 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 not an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). The legal expenses you have incurred in taking this action are capital in nature. The expense 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 pursuant to subsection 110-25(6) of ITAA 1997.

Reasoning

Section 8-1 of the 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] HCA 34; (1946) 72 CLR 634; (1946) 8 ATD 190 per Dixon J page 647-648). 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 generally revenue in nature and the legal expenses are deductible under section 8-1 of ITAA 1997 (Herald & Weekly Times v FC of T [1932] HCA 56; (1932) 48 CLR 113; (1932) 2 ATD 169). Where, however, the expenditure is devoted towards the business entity, structure or organisation rather than an operational purpose, the expenditure is of a capital nature and the expenses are not deductible (Sun Newspapers Ltd v FC of T [1938] HCA 73; (1938) 61 CLR 337; (1938) 5 ATD 87, per Dixon J page 359-360).

Capital expenditure incurred by the 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.

An easement is a right over someone else's land or property. It is an asset which is created at the time it is granted.

In your case, your neighbour sought an easement under section 88K of the Conveyancing Act 1919 (NSW) for imposition over your land. The court granted the easement and ordered to pay you a specified amount for the loss or disadvantage caused by it. Legal expenses were incurred in protecting your rights over your property. The Commissioner understands that, although you may have suffered a loss due to the easement, these costs were incurred to protect a right connected to a CGT asset and are not deductible under section 8-1 of the ITAA 1997. Since this expense was incurred to preserve your right over an asset, it forms part of the cost base of your asset when it is sold, pursuant to subsection 110-25(6) of the ITAA 1997.