Hi there,
I have an investment property, that is currently tenantent.
In 2023-2024 and to current, I have taken the builders of the property to VCAT and incurred legal fees from lawyers.
I took the builders to VCAT, because they earlier failed to perform defect repairs adequately that they agreed to, to the porperty + significantly delayed their rectifications, of which I wasn't able to continue to rent my apartment out for exactly 1 year because of this during their failed rectifications.
My claim against the builders at the VCAT, of which I have incurred approximately $60,000 in legal fees since 2023 - currently, is 2 fold. (1) To get the builders to give me monetary damages equivilent to completing the defect repairs to standard, so that I can organize repairs myself so that my property continues to be rentable + (2) to claim 1 year's worth of rental income lost, having relied on the builders to complete the repairs to standard at the time and without having had the builders delay this, which resulted in me not be able to rent my property out to produce rental income that I usually would.
This is all to make sure my property is rentable to tenants and is able to produce rental income.
I understand repairs for defects are classified as capital expenses.
My question is - are the legal fees I incurred pursuing the builders, part of it being for lost rental income while not being able to rent my property out to recieve rental income, claimable as a regular expense that I can claim against my business income for the year, or each relevant year the expenses occured as the legal case progressed, or it it treated as a capital expense as well?
Notes: My legal fees pursing the builders were to claim monetary damages for defect rectifications they didn't complete + the lost rental income predicament I described above.
I havn't claimed any of this - but in the case if I am allowed to amend my tax return for the relevant year, where in particular would I need to input this into? I use MyGov to access my ATO details.
I would appreciate some clarity on this.
Many thanks.
Kind regards
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3 replies
Author: NikkiATO(Community Moderator)Community Moderator 28 May 2026
Hi @Taxlearninggeek,
This is one of those situations where the answer depends on what the legal action relates to, and it isn’t a single treatment.
Legal expenses are treated based on what they are for:
- If they relate to earning or protecting rental income = they may be deductible.
- If they relate to capital matters (like improving or fixing the property structure) = they are capital and not deductible upfront.
From what you’ve described, your legal action has two parts:
Claim for defect rectification (building issues)
- This relates to the property itself.
- Costs connected with this are likely to be capital in nature.
Claim for lost rental income
- This is about income you would have earned.
- Legal costs for pursuing lost income may be treated as revenue‑related.
Your legal costs are for both purposes at the same time. That means the expenses may need to be apportioned between:
- capital (not immediately deductible)
- revenue (potentially deductible).
Where expenses are deductible, they are generally claimed in the year they are incurred, not all at once at the end.
If part of the costs is deductible, it would be claimed as an expense related to your rental property, not as separate business income.
The tax treatment follows the purpose of the legal action, not just the fact that it relates to a rental property.
Because there are mixed purposes (capital and income) and the amounts are significant, you’ll need the legal costs to be reviewed, and split based on what each part relates to.
Thanks Nikki,
That makes perfect sense.
The legal expenses that I have incurred were billed to me as a total, even though the legal expenses involved pursuing both of those parts (deductable expenses pursuing rent that I lost that I would have made but didn't because of the builders that I can claim if I'm understanding it correctly + the capital expenses which I can't claim).
Question - How would I know how much of the portion of those legal expenses that are can split, to depeerate the deductable expenses portion from my total legal bill for the corresponding year it was incurred? ie half the legal bill, or what was in my costs claim against the builders in the VCAT legal case, or something else?
I appreciate the help.
Thank you.
Kind regards
