ATO Interpretative Decision

ATO ID 2002/170

Income Tax

Deductibility of legal expenses - Breaches of management contract over a rental property
FOI status: may be released
  • This document has changed over time. View its history.

Status of this decision: Decision Current
CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Are legal expenses incurred by a taxpayer seeking damages for breaches to a management contract over a former investment property, allowable as a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. Legal expenses incurred by a taxpayer seeking damages for breaches to a management contract over a former investment property are allowable as a deduction under section 8-1 of the ITAA 1997.

Facts

The taxpayer owned a property that was used to produce assessable income during the year of income. The taxpayer entered into a contract with a property manager in relation to the management of the rental property. The terms of the contract include:

·
rental payments in arrears of two weeks are to be brought to the notice of the taxpayer; and
·
expenditure on the rental property for repairs and maintenance cannot be incurred by the property manager without the consent of the taxpayer.

The property manager breached the above conditions and the taxpayer incurred legal expenses to recover:

·
losses from non-collection of rents;
·
unauthorised expenditure for repairs and maintenance on the property; and
·
additional costs incurred in rectifying the unauthorised repairs and maintenance undertaken by the property manager but now incurred by the property owner.

Reasons for Decision

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature.

Legal expenses can be characterised as an outgoing on revenue account or an outgoing of a capital nature depending on the cause or purpose for which the legal expenses were incurred (Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; [1946] HCA 34; 8 ATD 190; (1946) 3 AITR 436). Where the legal expenses arise as a consequence of the day to day activities of a business, and the object of the expenditure is devoted towards a revenue purpose, the legal expenses are deductible (Herald and Weekly Times Ltd v. Federal Commissioner of Taxation (1932) 48 CLR 113; [1932] HCA 56; 2 ATD 169).

As the legal expenses were incurred during the year of income for damages based on revenue account (lost rents and unauthorised expenditure on repairs and maintenance), the expenditure is related to gaining or producing assessable income. The taxpayer is therefore entitled to a deduction under section 8-1 of the ITAA 1997 for legal expenses incurred in seeking damages for breaches to the management contract over the investment property.

Amendment History

Date of amendment Part Comment
20 June 2014 Reasons for Decision Updated to add medium neutral case citations
Case References Updated to add medium neutral case citations

Date of decision:  31 August 2001

Year of income:  Year ended 30 June 2001

Legislative References:
Income Tax Assessment Act 1997
   section 8-1

Case References:
Hallstroms Pty Ltd v. Federal Commissioner of Taxation
   (1946) 72 CLR 634
   [1946] HCA 34
   8 ATD 190
   (1946) 3 AITR 436

Herald and Weekly Times Ltd v. Federal Commissioner of Taxation
   (1932) 48 CLR 113
   [1932] HCA 56
   2 ATD 169

Keywords
Deductions
Legal expenses
Rental property

Business Line:  Small Business/Individual Taxpayers

Date of publication:  22 February 2002

ISSN: 1445-2782

history
  Date: Version:
  31 August 2001 Original statement
You are here 20 June 2014 Original statement