ATO Interpretative Decision

ATO ID 2002/799

Income Tax

Legal Expenses - Strata Title Common Property
FOI status: may be released
Status of this decision: Decision Current
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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 paid to secure tenants' enjoyment of strata title common property deductible under section 8-1 of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Decision

Yes, the legal expenses paid to secure tenants' enjoyment of strata title common property are deductible under section 8-1 of the ITAA 1997.

Facts

The taxpayer is a registered proprietor of a Strata Plan lot. They and their tenants have been denied access to part of the common property by another strata proprietor. Legal expenses were incurred in attempting to regain access to part of the common property. The dispute between the taxpayer and the other proprietor has not settled, despite an order in the taxpayer's favour from the Strata Title Referee.

Reasons for Decision

Section 8-1 of the ITAA 1997 provides that expenses will generally be deductible if their essential character is that the expenditure has a sufficient connection with the operations or activities that more directly gain or produce assessable income, provided that the expenses are not of a capital, private or domestic nature.

In this case, the expenses are not of a private of domestic nature, but may be capital, as the legal action taken relates to access to a capital item. Case law provides examples of situations where taxpayers have attempted to prevent damage to, or a reduction in value of, capital assets.

In AAT Case 5012 (1989) 20 ATR 3425; Case W30 89 ATC 300, the taxpayers merely sought retention of the status quo so as to avoid perceived damage to their business (FC of T v. Snowden & Willson Pty Ltd (1958) 99 CLR 431; John Fairfax & Sons Pty Ltd v FC of T (1959) 101 CLR 30 applied). No asset was acquired and no added benefit accrued to the partnership. All that accrued was the limitation of the nuisance. Therefore, the legal costs were not outgoings of a capital nature (Sun Newspapers Ltd v. FC of T (1938) 61 CLR 337 applied).

As a proprietor and tenant in common, the taxpayer is entitled to access and use the common property under the Strata Plan. In taking legal action against the other strata proprietor, they have not sought any new asset, advantage or right. The desired outcome of their legal action was merely to ensure the continued enjoyment of the area and to limit any adverse effects on the rental income from the unit and the common property. Therefore, the legal expenses are deductible under section 8-1 of the ITAA 1997.

Date of decision:  23 July 2002

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

Case References:
AAT Case 5012
   (1989) 20 ATR 3425

Case W30
   89 ATC 300

FC of T v. Snowden & Willson Pty Ltd
   (1958) 99 CLR 431

John Fairfax & Sons Pty Ltd v FC of T
   (1959) 101 CLR 30

Sun Newspapers Ltd v. FC of T
   (1938) 61 CLR 337

Keywords
Strata titles
Legal expenses

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  22 August 2002
Date reviewed:  12 August 2014

ISSN: 1445-2782