Legal expenses incurred on Assignment of a Crown Lease

Is a taxpayer entitled to a deduction under section 25-20 of the Income Tax Assessment Act 1997 (ITAA 1997) for the full amount of legal expenses incurred on the assignment of a crown lease where the property was used partly for private purposes?

No. A taxpayer is entitled to only a partial deduction under section 25-20 of the ITAA 1997 for legal expenses incurred on the assignment of a crown lease as the property was used only partly for private purposes.

The taxpayer acquired a leasehold property.

The property was held under a crown lease with a term of 99 years.

The taxpayer used the leasehold property as their residence for a number of years.

Later the taxpayer rented out the property for the purpose of producing assessable income.

The taxpayer has now disposed of the leasehold property by way of assignment of the lease to a third party.

The taxpayer incurred legal expenses in relation to preparing, registering and stamping the assignment of the lease.

Subsection 25-20(1) of the ITAA 1997 provides that a deduction is allowable for the costs of preparing, registering or stamping an assignment or surrender of a lease of property where the property has been used solely for the purpose of producing assessable income.

Under subsection 25-20(2) of the ITAA 1997, if the leasehold property was used partly for income producing purposes the deduction is allowed to the extent that the property was used for income producing purposes.

Although the term 'lease' is not defined in the ITAA 1997 the general law requirement is that a lease must be granted for a definite period. A crown lease with a term of 99 years is a 'lease' for the purposes of section 25-20 of the ITAA 1997.

As the property was not solely used to produce assessable income, subsection 25-20 (2) of the ITAA 1997 requires that the expenditure incurred be apportioned to reflect the period when the property was held for income producing purposes. It is appropriate to apportion on the basis of the period of time that the property was income producing, using the following calculation: Expenditure incurred * (Number of weeks the property was income producing / Total number of weeks the property was held by the taxpayer

The taxpayer is entitled to a deduction under subsection 25-20(2) of the ITAA 1997 calculated on this basis for a portion of the legal expenses incurred in preparing, registering and stamping the assignment of the lease.