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Income tax: if a lessee incurs legal expenses defending a lessor's attempts to terminate the lease, are these legal expenses an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 ?

No. The legal expenses are of a capital nature and are not deductible under section 8-1 (formerly subsection 51(1)).

Although these expenses are incurred by the lessee in the course of gaining or producing assessable income or carrying on a business for that purpose, the purpose of the expenditure is to secure the lessee's right to possession of the asset that is being leased and accordingly is of a capital nature. Example: Z leases business premises from ABC P/L. ABC P/L serves notice to terminate the lease. Z incurs legal costs of $1250 engaging a solicitor to defend the action. The $1250 is not allowable under section 8-1 as these expenses are of a capital nature.

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