Private ruling: Legal expenses - rental property - cost base - immediate deduction
Date of advice: 16 August 2019
Published: October 2019
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX

Ruling: Q1: Are the legal expenses incurred in relation to the dispute for repairs with the adjoining property owner allowable as an immediate deduction? | A1: Yes. | Q2: Do the legal expenses, in relation to council submissions form part of the cost base? | A2: Yes.

Relevant facts and circumstances: The clients that were tenanting your property, made a complaint that their sleep was significantly impacted by noise of the air conditioning units installed at the neighbouring property. Both noise and physical vibrations were being felt by the tenants through the wall and they threatened to vacate the property is the issue was not rectified. You provided details of an inspection which you then passed the relevant information to the owners of the property and they did not engage in coming to a resolution regarding the air conditioning units placement. The inspection report recommended a number of repairs as a result of the issue cause by the neighbouring property. You engaged a solicitor and the matter was proceeding to the relevant court with respect to necessary the repairs. You eventually came to a settlement with the owner of the neighbouring property to repair the outstanding issues provided you took no further actions or pursuit of costs. All expenses incurred are not covered by your insurance. You have provided details of the legal expenses incurred. You also incurred legal expenses related to making submissions in relation to an adjoining development. You requested council to make modifications to the development of an adjoining property, as you believed this would negatively impact the privacy and the market value of the property. You have provided details of the relevant expenses.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 subsection 110-25(6)

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses or outgoings to the extent which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to earning exempt income. 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. In your case, these expenses were incurred due to encroachments to your property by the adjoining property and the repairs needed to rectify the issue. The cost of repairs are 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. The legal action taken to repair the encroachments on your tenanted property will also be accepted as being on revenue account for the same reason. Therefore, the legal expenses will be an allowable deduction under 8-1 of the ITAA 1997. In determining whether a deduction for legal expenses is allowed under section 8-1 of the ITAA 1997, the nature of the expenses must be considered ( Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 3 AITR 436; (1946) 8 ATD 190). The nature or character of the legal expense follows the advantage that is sought to be gained by incurring the expenses. In your case, you have incurred legal expenses to stop the adjoining property's development that will negatively impact your property and the market value. The legal expenses are capital in nature as they relate to the asset from which income is earned, rather than to part of the income-earning process. Subsection 110-25(5) of the ITAA 1997 provides capital expenditure incurred to increase or preserve the asset ' s value; can be included in the cost base of the asset. The legal expenses that you incurred can be said to meet this description. As such, your legal expenses form part of the cost base of your property.