Private ruling: Deductions - legal expenses
Date of advice: 10 March 2026
Published: 29 June 2026
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Can you claim a deduction for the indemnity costs you were required to pay the strata body, the bailiff costs, and your legal fees? | A1: No.

Relevant facts and circumstances: You own a strata-title unit (the unit). You purchased the unit in 20XX. On or around Date 1, you wrote to Company A (the strata body) seeking approval for installation of several split-system air conditioners. You did not receive a response to your request. The styles of air conditioning systems approved for installation in the units are French duct systems and multiheaded split systems. By Date 2, the unit was being used to earn assessable income when the air conditioner broke down. The technician advised the air conditioner could be repaired but would inevitably break down again. They recommended it be replaced by several split systems. Their quote to do this was much cheaper than the cost of replacing the air conditioner with the systems approved by the strata body. You accepted the quote from the technician and did not seek written approval from the strata body after not receiving an initial response to your request sent on Date 1. On or around Date 3, you installed several split-system air conditioners. On Date 4, you were served with a contravention notice under the Unit Titles Scheme Act 2009 which required that the air conditioners be removed by Date 5. You didn't remove the air-conditioners and you were served with a second notice on Date 6. You still didn't remove them. On Date 7, the strata body commenced proceedings in the relevant forum to compel you to remove the air conditioning units from the common property and comply with the strata body's by-laws. On Date 8, an order was made that you remove the air conditioners by Date 9 and pay costs by Date 10. On Date 11, the strata body filed an Application for Registration of Order in the local court to register the orders made on Date 8. This was because you failed to remove the air conditioning units as ordered previously. On Date 12 and Date 13, the strata body wrote to you demanding removal of the air conditioning units in accordance with previous orders. On Date 14, following your continued failure to remove the air conditioning units, the strata body commenced proceedings by filing an originating application including seeking the following relief: • Damages in the form of legal costs for the strata body accruing from Date 15 On Date 16, you attended a conciliation conference at the local court. At that conference, you agreed to remove the air conditioners and repair at your own expense any damage to the common property arising from the installation and/or removal of the air conditioners by Date 17. You also agreed to pay the strata body's costs by Date 17. You removed the air conditioning units on or around Date 18 and replaced them. You continued to be in breach of order 2 of the orders previously made because you had not made good the damage from the air conditioning units and your new air conditioning system contained piping and conduit on common property. On Date 19, you attended a hearing regarding enforcement of the orders. The judge held that as at Date 20, you continued to be in breach of the orders as the new air conditioning units were installed in locations that encroached on common property On Date 21, the judge ordered that the strata body was entitled to a remedy arising under s23(3) of the Local Court (Civil Procedure Act) including damages in the form of legal costs accruing from Date 15. On Date 22, an assessment of damages took place at the local court. On Date 23, further orders were made in relation to the Assessment of Damages. You filed a Notice of Appeal in relation to a purported decision made by the Judicial Registrar in the course of the Assessment of Damages. On Date 24, your appeal was dismissed and you were ordered to pay the strata body's costs of the appeal at 100% of the Supreme Court Scale to be taxed or assessed. On Date 25, by way of the slip rule the judge made the following orders: 1. Pursuant to the slip rule the order made on Date 21 is amended by: a. Deleting from order 4 the words "including damages in the form of legal costs accruing from Date 15" b. Adding "the Respondent is to pay the Applicant's costs of and ancillary to the proceeding, to be taxed or agreed, at 100% of the Supreme Court scale" 2. Any application as to whether the taxation is on a standard or indemnity basis is to be made by Date 26. 3. The taxation of the Applicant's costs is to be conducted by the Judicial Registrar. 4. Order no.3 made on Date 23 is set to be aside. 5. The matter is adjourned to the Judicial Registrar. Pursuant to order 2 made on Date 25, the strata body made an application for indemnity costs. On Date 27, the judge made an order that the costs payable by you to the strata body be assessed up until Date 28 on an indemnity basis. You and the strata body could not agree on the costs so the issue proceeded to taxation (assessment). On Date 29, the court ordered that a Certificate of Taxation be issued in favour of the strata body. You lost access to the unit for a short time. However, you were able to resolve the matter before the strata body had arranged for the locks to be changed. On Date 30, you paid an amount to the bailiff. This amount consisted of the following: • Warrant seizure and sale • Application fee • Bailiff fee • Interest The bailiff paid an amount to the strata body. You are also seeking a deduction for an amount, being the difference between the amount you paid the bailiff and the amount they paid the strata body. You have also paid an amount of legal fees in connection with this issue.

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

Reasons for decision: Summary: You can't claim a deduction for the indemnity costs you were required to pay the strata body, the bailiff costs, and your legal fees,as these expenses are considered to be capital in nature . | Detailed Reasoning - Detailed reasoning: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses or 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, or relate to the earning of exempt income. 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, as explained in Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634. The nature of the legal expense follows the advantage that is sought to be gained by incurring the expense. As outlined in Herald and Weekly Times v Federal Commissioner of Taxation (1932) 48 CLR 112;2 ATD 169), where legal expenses arise as a consequence of the day-to-day activities of a business, the object of the expenditure is devoted towards a revenue end and the legal expenses are deductible. However, as discussed in Sun Newspapers Ltd v FC of T (1938) 61 CLR 337; 5 ATD 87; (1938) 1 AITR 403, where expenditure is devoted to a structural rather than an operational purpose, the expenditure is of a capital nature and the expenses are not deductible. 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. Expenditure is capital in nature where it is made with a view to bring into existence an asset or advantage that is of an enduring benefit. Capital expenditure is characterised by the fact that it is usually a one-off payment and establishes, replaces, enlarges or preserves an asset. An example of preserving an asset is where a rental property owner defends an action by a neighbour claiming that a newly constructed shed on the rental property is too close to the property boundary and must be removed. Any expenses incurred in defending the action are capital in nature as the enduring benefit sought is the preservation of the asset at the rental property. | Detailed Reasoning - Application to your circumstances: In your case, your legal costs arose due to the strata body taking action against you to remove newly installed replacement air conditioners at your rental unit. Air conditioners are capital items being separate assets themselves. That is why the cost of replacing an air conditioner at a rental property is not deductible as a repair; rather, a depreciation deduction is allowed in relation to the air conditioner as it is a depreciating asset. The legal expenses you incurred in defending the action of the strata body are capital in nature as the enduring benefit sought was the preservation of assets at your rental property. The legal expenses were incurred for structural rather than operational purposes. That is, they were incurred in relation to the structure that derived the rental income (being the rental property including the assets in it) rather than in relation to the day-to-day operation of the income earning activity. Also, the indemnity and bailiff costs were incurred in order for you to preserve your ownership of the rental unit. These are clearly a one-off type expense that is related to the structure of the income earning activity rather than its day-to-day operation. Therefore, these are also considered to be capital in nature and consequently not deductible. | Detailed Reasoning - Additional information: Section 110-25 of the ITAA 1997, provides the general rules about the cost base of a Capital Gains Tax (CGT) asset. Included in the cost base of a property for CGT purposes, is capital expenditure where the purpose or the expected effect of the expenditure is to increase or preserve the asset's value, and capital expenditure incurred to establish, preserve or defend your title to the asset, or a right over the asset.