Private ruling: Legal expenses
Date of advice: 11 May 2022
Published: July 2022
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to a deduction for legal expenses incurred in evicting a tenant, terminating a lease agreement and recovering unpaid rent? | A1: Yes. Section 8-1 of the Income Tax Assessment Act 1997 allows for a deduction for a loss or outgoing to the extent that it is incurred in gaining or producing your assessable income. Accordingly, you are entitled to a deduction under section 8-1 of the ITAA 1997 for legal expenses you incurred in evicting a tenant, terminating a lease agreement and recovering unpaid rent on the basis that the expenses arose as a consequence of your income earning activities. The ATO guide Rental properties 2021 also lists some types of legal expenses that are deductible including the costs of evicting a non-paying tenant, and taking court action for loss of rental income.

Relevant facts and circumstances: The lessor is the sole owner of the rental property. The lessor has not used the property for any private purpose. The tenants are unrelated to the lessor. The property was leased at market value. The lessor and tenants entered into an agreement with Company A. The tenants would pay a lump sum to Company A. Company A would then pay rent on behalf of the tenants to the lessor for several years. Company A was not a party to the lease agreement. Company A ran out of money in 20XX. Liquidators were appointedthat year. The lessor has not received any rent since 20XX. After the failure of Company A, the lessor requested the tenants to begin to pay rent. They refused to pay rent or vacate the property. The lessor commenced legal proceedings to evict the tenants and terminate the lease on the grounds of non-payment of rent which was a breach of the terms of the lease, entitling the lessor to terminate the lease. The court found in favour of the lessor, that the tenants must vacate the premises. The court ordered that Company A was liable for the unpaid rent, and as they were not a party to the proceedings no rent was recovered. The tenants vacated the property on 1 July 20XX. The lessor did not have professional indemnity insurance The lessor signed a settlement deed agreeing not to seek to recover legal costs from the tenants. The lessor made their first payment towards legal fees in December 20XX and final payment in June 20XX.

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