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ATO Interpretative Decision

ATO ID 2001/4

Income Tax
Income tax: Legal Expenses (Opposing building application)

FOI status: may be released
Status of this decision: Decision Current

CautionCAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.


Issue

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

Decision

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

Facts

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.

Reasons For Decision

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.

Date of decision: 18 December 1996

Legislative references:
Income Tax Assessment Act 1936
   subsection 51(1)

Case references:
FC of T v. McDonald
   87 ATC 4541
   (1989) 18 ATR 957

Case W30
   89 ATC 300

AAT Case 5012
   (1989) 20 ATR 3425

John Fairfax & Sons Pty Ltd v. FC of T
   (1959) 101 CLR 30
   11 ATD 510

Broken Hill Theatres Pty Ltd v. FC of T
   (1952) 85 CLR 423
   9 ATD 306

Sun Newspapers Ltd v. FC of T
   (1938) 61 CLR 337

Related Public Rulings (including Determinations)
TR 93/32
IT 2423

Keywords
Legal expenses
Rental expenses
Carrying on a business
Capital expenditure

Business line: Small Business/Individual Taxpayers

Date of publication: 4 June 2001

ISSN: 1445-2782

 


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