Private ruling: legal fees
Published: March 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to a deduction for the legal expenses you incurred in disputing your liability to the repair expenses? | A1: Yes.

Relevant facts and circumstances: You have owned a rental property for many years. The body corporate has charged you levies for repairs carried out on this rental property. You withheld the levies because the body corporate failed to pay for the repair expenses. You have incurred legal fees disputing with the body corporate in regards to your liability to pay for the repairs.

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 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 purpose for which the legal expenses were incurred ( Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 8 ATD 190; (1946) 3 AITR 436). Where the legal expenses arise as a consequence of the taxpayer's income earning activities, and the object of the expenditure is devoted towards a revenue purpose, the legal expenses are deductible. ATO Interpretive Decision ATOID 2002/1027 details that, 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, repairs were required to your rental property. The body corporate charged you levies in relation to these repairs. You have withheld the levies as the body corporate failed to pay for the repair expenses. You have incurred legal fees to dispute your liability to the repair expenses. As the legal fees were incurred in relation to the repair expenditure they are considered an outgoing on revenue account. Therefore, you are entitled to a deduction for the legal fees under section 8-1 of the ITAA 1997.

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