Issue
Is a taxpayer entitled to a deduction for legal expenses incurred in asserting title to a rental property under section 8-1 of the Income Tax Assessment Act (ITAA 1997)?
Decision
No. The taxpayer is not entitled to a deduction for legal expenses incurred in asserting title to a rental property under section 8-1 of the ITAA 1997.
Facts
The will of a deceased person nominated the taxpayer as a beneficiary to inherit property.
Ownership in the property passed from the estate to the taxpayer.
The taxpayer derived assessable income from the property in the form of rents.
The taxpayer's ownership of the property was contested by a relative of the deceased person.
The taxpayer as beneficiary in the deceased estate: • engaged legal representation to assert title to the inherited property; and • incurred legal expenses to defend the action from a relative.
Reasons for Decision
Section 8-1 of ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature.
In determining whether a deduction is allowable under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered ( Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; 8 ATD 190; 3 AITR 436 per Dixon J). The nature or character of the legal expenses follows the advantage which is sought to be gained by incurring the expenses.
Where legal expenses arise as a consequence of the day to day activities of a business, the object of the expenditure is devoted towards a revenue end and the legal expenses are deductible ( Herald & Weekly Times v. Federal Commissioner of Taxation (1932) 48 CLR 113; 2 ATD 169). However, where the expenditure is 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. FC of T (1938) 61 CLR 337; 5 ATD 87; (1938) 1 AITR 403).
The taxpayer incurred legal expenses to assert title to an investment property rather than for the purposes of the operation of the rental property. Accordingly, the legal expenses are of a capital nature and are not deductible under section 8-1 of the ITAA 1997.