Private ruling: Rental property expenses
Published: October 2013
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to a deduction for legal expenses and building expert reports incurred in rectifying damages to your rental property? | A1: Yes.

Relevant facts and circumstances: You have a rental property which has been rented since the 200X financial year. You were notified by the local city council that they would be carrying out stormwater drainage augmentation works along your property. The property was damaged during these works. The property was previously in good condition. You are seeking rectification of the damages. The matter is currently in court proceedings and waiting for judgement. You have incurred expenses in obtaining building expert reports and legal fees.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 and | Income Tax Assessment Act 1997 Section 25-10.

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (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. 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). 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 to a revenue purpose, the legal expenses are deductible ( Herald and Weekly Times Ltd v. Federal Commissioner of Taxation ( 1932) 48 CLR 113; 2 ATD 169). The cost of obtaining a defective building works report is viewed as being in the nature of a legal expense. 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. In your case, the cost of obtaining the building expert reports and the legal expenses were incurred as a result of damages based on revenue account (cost of covering repairs). Therefore, the expenditure is related to gaining or producing assessable income and is not considered to be private or capital in nature. Accordingly, you are entitled to deductions for the building expert reports and the legal expenses incurred in rectifying the damage caused to your rental property.