Private ruling: Rental - deductions (repairs, capital works, interest, borrowing expenses)
Published: September 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to claim a deduction for the cost of the interest expense incurred as a result of drawing down on your rental property loan to pay for legal fees that relate to your court settlement? | A1: No. | Q2: Can any of the legal fees that you incurred be added to the cost base of the property? | A2: No.

Relevant facts and circumstances: You and a third party purchased a duplex rental property together. A court awarded you and the third party one duplex each. You drew down $X on the rental property loan to assist you in paying your legal fees.

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

Reasons for decision: Summary: Under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) you can claim a deduction for expenses to the extent to which they are incurred in gaining or producing your assessable income, or they are necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. No deduction is allowed for expenses to the extent to which they are of a capital, private or domestic nature or they are incurred in gaining or producing exempt income. To be deductible under section 8-1 of the ITAA 1997 a loss or outgoing must have a sufficient connection with the derivation of the taxpayer's assessable income. Taxation Ruling TR 95/25 provides that the deductibility of interest is determined by the use for which borrowed money is intended, it is essentially a question of fact. It is the use of the funds borrowed that is relevant. Where borrowed funds are used for private purposes, such as the acquisition of a home, the interest will not be deductible even if there is a secondary result that other assets are able to be retained for the purpose of producing assessable income. In your case, you drew down on your rental property loan to pay for legal fees associated with your court settlement. We have determined that you cannot claim deductions for interest expenses on the loan used to pay your legal fees in regards to your court settlement. The payment of the legal fees is considered private in nature. The interest therefore is not incurred in gaining or producing your assessable income or in carrying on your business. Similarly it cannot be said to be a cost of ownership of the property, the cost of an improvement, or to preserve the value of the property or to protect your title to the property. Hence it does not form part of the cost base of your property.