ATO ID 2002/245: Lease Expenses - business purchase does not proceed
Date of decision: 20 December 2001
Year of income: Year ended 30 June 2001
Business line: Private Groups and High Wealth Individuals

Issue
Are legal expenses incurred in the preparation of a lease allowable deductions, under section 25-20 of the Income Tax Assessment Act 1997 (ITAA 1997), when the purchase of the business, to which the lease related does not proceed?

Decision
No. The legal expenses are not deductible under section 25-20 of the ITAA 1997.

Facts
The taxpayer, an individual, decided to purchase a business. A purchase price and an expected change over date were agreed upon with the owner of the business. Legal expenses were incurred with regard to the proposed lease of the property from which the business operated. The offer of lease was withdrawn and the taxpayer did not proceed with the purchase of the business.

Reasons for decision
Summary: Section 25-20 of the ITAA 1997 allows a deduction for expenditure incurred in preparing, stamping and registering a lease of property which is used, or will be used, for the purpose of producing assessable income. Such expenditure is of a capital nature and, apart from section 25-20 of the ITAA 1997, would not be deductible. In this case the taxpayer did not proceed with the business purchase or the lease and, therefore, did not and could not derive any assessable income from the property subject to the lease. As the taxpayer did not enter into a lease and therefore did not and could not use the property to derive assessable income, the requirements of section 25-20 of the ITAA 1997 were not met. Therefore no deduction is allowed for the legal expenses incurred in preparing the proposed lease.

Legislative references: Income Tax Assessment Act 1997 section 25-20
Subject references: Deductions & expenses Lease & hire expenses