Private ruling: Rental - deductions
Date of advice: 3 November 2021
Published: January 2022
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to a deduction for the legal expenses incurred to defend against the claim of compensation for damaged property and relocation? | A1: Yes. | Q2: Are you entitled to a deduction for the expenses incurred for a mould expert to inspect the property and provide a report? | A2: Yes. | Q3: Are you entitled to a deduction for the legal expenses incurred to defend against the claim of compensation for damaged property and relocation? | A3: Yes. Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent that they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. You have incurred the expenses in your capacity as landlords of the rental property. The expenses arose out of the letting of the premises to a tenant for the purposes of producing assessable income. There is a clear connection between the expenses incurred and the rental income such that the expenses are incidental and relevant to the generation of their assessable rental income. There was no enduring benefit produced by the expenditure and therefore it is appropriate to treat the expense as being on revenue account. Therefore, you are entitled to a deduction under section 8-1 of the ITAA 1997 for the expenses incurred in defending the damages claim.

Relevant facts and circumstances: You owned a rental property Upon moving into the property, the tenant constantly made requests for repairs. Your perception was that the tenant's expectations were unrealistic and some complaints trivial. The property was in good condition before you decided to place it on the rental market and at no time were you advised by the real estate agent that you needed to do any type of repairs or rectifications to the property. In light of the amount of ongoing requests, you offered the tenant to break the lease at no cost to them. You felt that the property did not, and would not, ever suit the tenant. The tenant did not take up the offer but continued to want constant repairs to the property. The tenant claimed that the property was infested with mould. The mould infestation was also claimed to be damaging the health of the tenants and they claimed the house was uninhabitable. You engaged a mould expert to inspect the property. A report was provided that indicated that there was no mould infestation. The tenant then proceeded to the state tribunal. They requested that the landlords replace most of the property contained within the house as well as relocating her to a new address. You engaged a lawyer to advise and defend your case through the tribunal proceedings. The tribunal member ruled upon seeing the evidence provided by both parties and dismissed the case made against you. The tenant agreed to leave the property. The tenant applied to tribunal to appeal that their original case was not heard fairly by the sitting member. The tribunal panel took some nine months to consider a decision. The tenant's claim was upheld and another tribunal hearing was scheduled. The tenant was advised by the tribunal member that the maximum amount that could be claimed/awarded through the tribunal was $XX,XXX. The member for tribunal advised the tenant that if they wished to claim for a greater amount than the $XX,XXX they would need to go to the local courts who would be able to rule on this. The tenant requested tribunal to move the matter to the local courts. You made various offers during the whole process to try to settle this matter in an economically sensible form; the tenant always rejected any offer. In an attempt to close the matter and reduce any ongoing financial burden you increased your offer. The tenant now accepted the revised amount which closed the matter. You incurred the following expenses:

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1


Legal fees to defend against the claim of compensation for damaged property and relocation: