Private ruling: Rental property - legal expenses
Published: March 2014
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a deduction for expenses you incurred in objecting to planning permits for the construction of a neighbouring commercial property? | A1: No.

Relevant facts and circumstances: You do not carry on a business. You hold a commercial rental property. You objected to planning permits associated with the construction new premises on a neighbouring property. The purpose of your objection was to protect the current and future value of your property as well as its future rental earning capacity. Your objection to the planning permits has been unsuccessful which will potentially result in a reduction in the amount of rent being received for the property when the lease comes up for renewal. You have incurred costs in objecting to the planning permits.

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

Reasons for decision: Summary: You can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income except where the loss or outgoing is capital or private in nature (section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)). 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. FC of T (1946) 72 CLR 634; 8 ATD 190; 3 AITR 436). The nature or character of the legal expenses follows the advantage which is sought to be gained by incurring the expenses. If the advantage to be gained is of a capital nature, rather than of a revenue nature, then the expenses incurred in gaining the advantage will also be of a capital nature. Where legal expenses arise out of the day to day activities by which a taxpayer earns their assessable income , and the object of the expenditure is devoted towards a revenue purpose, the legal expenses are deductible ( Herald & Weekly Times v. Federal Commissioner of Taxation (1932) 48 CLR 113; 2 ATD 169). However, where the expenditure is devoted towards a structural rather than an operational purpose, that is, they relate to the profit yielding structure, the expenditure is of a capital nature and the expenses are not deductible ( Sun Newspapers Ltd v FC of T (1938) 61 CLR 337; ATD 87; (1938) 1 AITR 403). In Broken Hill Theatres Pty Ltd v. FC of T (1952) 85 CLR 423; 9 ATD 306 the taxpayer incurred expenses opposing the granting of a licence to a competitor which would have seen a reduction in the taxpayer's income. The potential loss in income did not alter the Courts view that the expenditure was capital expenditure incurred in preserving the income earning structure. Similarly, the expenses you incurred in objecting to the planning permits can be attributed to the preservation of your income earning structure. As such, the expenses are capital in nature and you are not entitled to a deduction under section 8-1 of the ITAA 1997.