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Whether expenses incurred in opposing a building application are deductible to the owners of a rental property.

The expenses incurred in opposing a building application are not deductible to the owners of the rental property.

The taxpayers own a rental property. The property has views that enhance the prospects of renting the property. Owners of the adjacent property lodged a building application that would have blocked almost one half of the views from the taxpayers' property. After accepting submissions, the Council refused the application.

In actively objecting to the application, the taxpayers incurred various expenses including telephone, postage, travelling and legal costs. They argue that these expenses are a legitimate cost of maximising the profit of an ongoing business (the renting of the property) and that Case W30 89 ATC 300; AAT Case 5012 (1989) 20 ATR 3425 supports this view.

The taxpayers are not 'carrying on a business' and therefore cannot claim a business deduction under subsection 51(1) of the Income Tax Assessment Act 1936. IT 2423 (Withholding tax : whether rental income constitutes proceeds of business - permanent establishment - deduction for interest) states that in order to judge whether a business of letting property exists, the scale of operations must be looked at. Deriving income from renting one or two residential properties would not normally be thought of as a business. Therefore, the taxpayers are not allowed a deduction under the 'second limb' of subsection 51(1) as they are not 'carrying on a business' and Case W30 89 ATC 300; AAT Case 5012 (1989) 20 ATR 3425 does not apply to their situation.

Neither are the expenses deductible under the 'first limb' of subsection 51(1) as being incurred in gaining or producing assessable income. In Broken Hill Theatres Pty Ltd v FC of T (1952) 85 CLR 423; 9 ATD 306 it was held that expenses incurred in opposing the granting of a licence to a competitor which would have seen a reduction in the taxpayer's income were capital costs. Similarly, the expenses incurred by the taxpayers in challenging the building application can be attributed to the preservation of their income earning structure and are thus non-deductible capital costs.