Private ruling: Deduction for legal expenses
Date of advice: 1 March 2018
Published: June 2018
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are your legal expenses incurred defending against a claim for damages deductible? | A1: Yes

Relevant facts and circumstances: You own a rental property An existing tenant commenced legal proceedings against you for negligence The claim was for damages based on the alleged unsafe condition of the property due to asbestos contamination You retained a lawyer to act on your behalf The full and final settlement of the claim was reached. In defending yourself against the claim you incurred legal expenses

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 a loss or an outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature. Therefore, in determining whether a deduction is allowable under section 8-1 of the ITAA 1997, the nature of the expense must be considered. For legal expenses to constitute an allowable deduction, it must be shown that they are incidental or relevant to the production of the taxpayer's assessable income or business operations, ( Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431). Further, legal expenses are generally deductible if the expenses arise out of the day to day activities of the taxpayer's business ( Herald and Weekly Times Ltd v. Federal Commissioner of Taxation (1932) 48 CLR 113; (1932) 39 ALR 46; (1932) 2 ATD 169), and the legal action has more than a peripheral connection to the taxpayer's income producing activities ( Magna Alloys and Research Pty Ltd v. FC of T (1980) 49 FLR 183; (1980) 11 ATR 276; 80 ATC 4542). In your case the legal expenses were incurred in responding to the legal action taken against you as owner of the rental property. Because the legal expenses incurred have the relevant connection to your income producing activities they are therefore a valid deduction | Detailed Reasoning - Conclusion: Based on the facts you have provided, the legal expenses meet the requirements of Section 8-1 of the ITAA 1997 and therefore are an allowable deduction.