Why Are Lawyers Exempt?

[Perry]

So one buys a commercial rental. The valuer’s fee is
deductible. The LIM report cost is deductible. The
accountant’s fee is deductible. The builder’s inspection
fee is deductible. And so it goes on.

But the lawyer’s fee is not deductible!

Why? It’s an expense, analogous to the others that
I’ve listed.

[David_W]

Agree with your sentiments Perry - it is a bit of a strange one. There is often a grey line in the capital/revenue distinction imo.

I think what the legislature was trying to get at the situation of capital assets being acquired, and lawyers' fees to procure such asset went hand in hand with that asset - so they thought, will not capitalise the legal fees too.

When I practised law we had an almighty argument with the IRD, when acting for one of the leading commercial landowning companies in NZ on the capital/revenue distinction and the deductibility of legal fees.

To cut a long story very short, the rationale and select committee papers behind the reason for legal fees not being deductible is that they relate to the acquisition of an asset (held on capital account). Due diligence costs, accountant's fees, bank charges, valuer's costs are all deductible because there is a nexus between the revenue generating activities (or necesssary compliance activities ancilliary to the lease income).

Take note though, that legal fees in relation to financing costs are generally deductible.

[Perry]

"It's our job to be fair," the old advert cliche went.

The IRD's efforts to oblige farmers changing to dairy to
capitalise the cost of grassing was another strange
beast. I don't know whether or not they persisted with
that crazy idea, but I wondered what the capital value
of a blade of grass would be, when included in the
depreciation schedule.

Letting politicians decide on tax matters (from whence
comes their stipend) is like letting the Mongrel Mob be
the jury in a dope case.

[Wayne]

My understanding from my accountant was that costs associated with the purchase of the property must be capitalised but costs associated with obtaining a mortgage are expensed. If you need a valuation for the mortgage then expense it. If your lawyer will seperate the purchase from the mortgage claim on those portions otherwise I split down the middle.

[Perry]

My understanding from my accountant was that costs
associated with the purchase of the property must be
capitalised but costs associated with obtaining a mortgage
are expensed. If you need a valuation for the mortgage then
expense it. If your lawyer will separate the purchase from
the mortgage claim on those portions otherwise I split down
the middle.

I think your accountant is being rather conservative.
E.g. I would expect that obtaining a LIM report would
not be capitalised.

I find the hair-splitting over revenue expense versus capital
expense very frustrating and inconsistent. The general
principle is (used to be) that any expense could be either
capitalised or expensed, but certainly not both. A capital
item is something that's included in the depreciation
schedule and is depreciated. An expense item is a purchase
of something that does not result in the a depreciable object.

So petrol purchased for the car is expensed, the purchase
of the car is capitalised.

A toll call is expensed, the purchase of the telephone is
capitalised.

Neither the petrol nor the toll call are assets that can be
depreciated. The car and the telephone are assets that can
be depreciated.

The cost of the toll call is not added to the capital value
of the telephone. Nor is the cost of the petrol added to the
capital value of the car.

OK, so far?

So one purchases a commercial property with the intention
of renting it to a tenant. The purchase price of the property
is what is (should be) put into the lessor's depreciation
schedule. The costs associated with that purchase, all the due
diligence things, plus associated fees, survey, builder and
other reports; accountant and lawyer services, land transfer
fees, etc., are all expenses in that do not directly produce
a depreciable item. Only indirectly are they instrumental in
obtaining a depreciable item. They are an indirect,
associated cost of obtaining an asset. They are not assets in
themselves, in the capital sense of that word.

But, by a piece of crafty sleight-of-hand, the IRD decides
that, in the interests of it's more immediate cash flow, some
of those expenses must be added to the purchase price of the
asset and some not. I.e. inconsistency abounds in the cause
of pecuniary self-interest.

[Perry]

Fast Forward . . .

Previous posts have dealt with purchases. However, the
same non-deductible sleight-of-hand applies to 'normal'
business expenses.

Let's say that a lease is drawn up for a commercial property.
The lessee and lessor's lawyers are involved. The standard
term in the lease agreement - a normal cost of business, says
that the lessee shall pay the lessor's legal costs.

In part, I speculate that's because the lessor can't claim them
as a deductible revenue expense. It certainly couldn't be called
a capital expense, even by the IRD's super-elastic standards
of convenience.

Right, David? I.e. it's not a grey area, it's a grab area!

[Wayne]

As far as I am aware this is because it is expected that the lessee pays all costs - for anything. We had a building where the tennant paid for our loss of rent insurance.

If the lessee didn't pay it would be claimable by the lessor as far as I know (I am not an accountant though!).