ATO Interpretative Decision

ATO ID 2002/1027

Income Tax

Landlord - Cost of defective building works report
FOI status: may be released
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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

Is the taxpayer, a landlord, entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the cost of a defective building works report prepared by a professional building consultant?

Decision

Yes. The taxpayer, a landlord, is entitled to a deduction under section 8-1 of the ITAA 1997 for the cost of a defective building works report prepared by a professional building consultant.

Facts

The taxpayer owns an investment property.

During the income year, various repairs were completed in relation to the investment property which proved to be faulty.

As a result of these faulty repairs, the premises became temporarily unfit for occupation and the tenant was obliged to move out.

On advice from the taxpayer's solicitor, the taxpayer incurred costs in obtaining a defective building works report from a building consultant in order to establish their legal position in relation to:

·
recovering costs from the builder (who performed the faulty repairs); and
·
their lease obligations to the tenant.

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.

Expenses that are 'incidental and relevant' to the taxpayer's income earning activities are considered to be sufficiently connected with the derivation of assessable income and therefore will be an allowable deduction under section 8-1 of the ITAA 1997 (Ronpibon Tin NL & Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; [1949] HCA 15; (1949) 4 AITR 236; (1949) 8 ATD 431).

Therefore, providing that the expense can be objectively viewed as a necessary or natural consequence of the taxpayer's income earning activities, the expense will be 'incidental and relevant' to the income earning activities of the taxpayer.

The taxpayer incurred the cost of obtaining a defective building works report in order to assist them in establishing their legal position with respect to their rights against the builder and any potential liability to their tenant.

The cost of obtaining the defective building works report may be viewed as being in the nature of a legal expense.

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; (1946) 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; (1932) 2 ATD 169).

The cost of repairs, as distinct from improvements, to an investment property are accepted as being on revenue account as they are incidental and relevant to the income earning activities as a landlord. Legal action taken by a landlord to recover the cost of those repairs would also be accepted as being on revenue account for the same reason.

Further, the expenditure incurred in establishing the taxpayer's legal obligations to their tenants can be viewed as a natural consequence of the taxpayer's income earning activities and therefore 'incidental and relevant' to the derivation of rental income.

Therefore the taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997 for the cost of a defective building works report.

Amendment History

Date of amendment Part Comment
6 June 2014 Reason for Decision Updated case references
Minor grammatical amendment.
Case References Updated case references.

Date of decision:  23 October 2002

Year of income:  Year ended 30 June 2002

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

Case References:
Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation
   (1949) 78 CLR 47
   [1949] HCA 15
   (1949) 4 AITR 236
   (1949) 8 ATD 431

Hallstroms Pty Ltd v. Federal Commissioner of Taxation
   (1946) 72 CLR 634
   [1946] HCA 34
   (1946) 8 ATD 190

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

Related ATO Interpretative Decisions
ATO ID 2002/1026

Keywords
Landlord expenses
Rental expenses
Rental property
Landlord & tenant
Deductions
Legal expenses

Business Line:  Small Business/Individual Taxpayers

Date of publication:  30 October 2002

ISSN: 1445-2782

history
  Date: Version:
  23 October 2002 Original statement
You are here 6 June 2014 Updated statement