Private ruling: Legal expenses
Published: October 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a deduction for legal expenses? | A1: Yes.


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

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a person to claim a loss or outgoing that is incurred in gaining or producing assessable income so long as the loss or outgoing is not of a capital, private or domestic nature. In determining whether a deduction for legal expenses is allowed under section 8-1 of the ITAA 1997, the nature of the expenditure 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 expenses follows the advantage that is sought to be gained by incurring the expenses. If the advantage to be gained is of a capital nature, then the expenses incurred in gaining the advantage will also be of a capital nature. Legal expenses may be of a revenue nature and therefore deductible if they arise out of the day to day activities of the taxpayer's income producing activity ( Herald and Weekly Times Ltd v. Federal Commissioner of Taxation (1932) 48 CLR 113; (1932) 2 ATD 169). Where however, expenditure is devoted towards a structural rather than an operational purpose, the expenditure is of a capital nature and the expenses are not deductible. In your case, you and the other sub-lessees of the marina undertook action to have the lessor repay you over charged expenses, interest on the overpaid amount, reclassification of the percentage of berths and legal expenses. This expense related to the day to day activities of your income producing activity. Therefore you are entitled to a deduction for your share of the legal costs.

Relevant facts: You hold the sub-lease of a marina berth of which there are more than 50. | You have rented the berth at arm's length since about 200X. | Attached to the marina is a building with residential units, commercial units and car parking. | The lessor is trying to have the sub-lessees pay costs relating to the building as well as the marina. | You and the other sub-lessees have taken legal action to have the lessor; | · adhere to the terms of the lease by charging you only your share of costs relating to the marina; | · repay amounts that have been overcharged plus interest on the overcharged amount; | · provide you with an account of outgoings to confirm your share of expenses charged to you; | · amend the percentage of the tenant's contribution by adjusting the total aggregate unit entitlement; | · pay your legal costs and interest.