Private ruling: Legal expenses
Date of advice: 18 August 2015
Published: August 2015
Ruling period: Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020 | Year ending 30 June 2021 | Year ending 30 June 2022 | Year ending 30 June 2023 | Year ending 30 June 2024 | This scheme commenced on: | 1 July 2015

Ruling: Q1: Will the legal expenses you incurred in relation to your rental property form part of your cost base for capital gains tax purposes? | A1: Yes



Reasons for decision: Summary: The courts have determined that the nature or character of legal expenses follows the advantage which is sought to be gained by incurring the expenses ( Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; 8 ATD 190; 3 AITR 436 per Dixon J). Where legal expenses are devoted towards a structural rather than an operational purpose, the expenditure is of a capital nature and the expenses are not deductible ( Sun Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; 5 ATD 87; (1938) 1 AITR 403). In addition, outgoings incurred in the preservation of an existing capital asset have been held to be capital in nature ( John Fairfax & Sons Pty Limited v. Federal Commissioner of Taxation (1959) 101 CLR 30; (1959) 7 AITR 346; (1959) 11 ATD 510). In your case, you intend incurring legal expenses to resolve a dispute in relation to a boundary fence between your property and a neighbouring property. The legal expenses that you will incur are capital in nature as they relate to the asset from which income is earned rather than to part of the income-earning process. Subsection 110-25(6) of the Income tax Assessment Act 1997 explains that capital expenditure incurred to preserve or defend your title to an asset, or your right over an asset, can be included in the cost base of that asset. The legal expenses that you incurred can be said to meet this description. As such, your legal expenses form part of the cost base of your rental property.

Relevant facts: You own a tenanted residential property. | The property has been rented for a long time. | You and a neighbour have a dispute over the location of a boundary fence between your properties. | You engaged a solicitor to resolve the dispute. | You will not be reimbursed for your legal expenses. | Relevant legislative provision: Income Tax Assessment Act 1997 subsection 110-25(6).