ATO Interpretative Decision
ATO ID 2002/938
Income Tax
Legal expenses incurred to preserve a financing arrangementFOI status: may be released
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This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
Status of this decision: Decision Current
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Are legal fees incurred by a taxpayer in defending the financing arrangement for the purchase of a motor vehicle deductible under section 8-1 of the Income Tax Assessment Act 1997 ('ITAA 1997')?
Decision
No. Legal expenses incurred by a taxpayer in defending the financing arrangement for the purchase of a motor vehicle are not deductible under section 8-1 of the ITAA 1997.
Facts
The taxpayer entered into a hire purchase financing arrangement for a new motor vehicle which is used solely for business purposes.
An error was made which resulted in an understatement of the purchase price being financed.
This error had the effect of reducing the amount of monthly instalments payable by the taxpayer.
The lessor and the taxpayer were unable to settle the dispute and the lessor proceeded with legal action.
The taxpayer incurred legal expenses in defending the legal action.
Reasons for Decision
Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent that they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.
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; (1946) 8 ATD 190; (1946) 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; (1932) 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. Federal Commissioner of Taxation (1938) 61 CLR 337; (1938) 5 ATD 87; (1938) 1 AITR 403).
In the case Kennedy Holdings and Property Management Pty Ltd v. Federal Commissioner of Taxation (1992) 39 FCR 495; (1992) 92 ATC 4918; (1992) 24 ATR 321, a payment by a lessor to the lessee to terminate the lease in order to grant a new and more profitable lease to a new tenant, was held to be capital in nature and not deductible. The payment secured a permanent advantage, that is, the surrender of the lease with the option to renew.
Although the taxpayer's vehicle is used to produce income, the expenditure was incurred to protect the financing arrangement which determined the cost of the asset from which the taxpayer derived income.
The advantage sought in preserving the financial arrangement is capital in nature. Accordingly, the legal expenses incurred by the taxpayer in relation to the financing arrangement are considered capital and not deductible under section 8-1 of the ITAA 1997.
Date of decision: 12 September 2002Year of income: Year ended 30 June 2000 Year ended 30 June 2001 Year ended 30 June 2002
Legislative References:
Income Tax Assessment Act 1997
section 8-1
Case References:
Hallstroms Pty Ltd v. Federal Commissioner of Taxation
(1946) 72 CLR 634
(1946) 8 ATD 190
(1946) 3 AITR 436
(1932) 48 CLR 113
(1932) 2 ATD 169 Sun Newspapers Ltd v. Federal Commissioner of Taxation
(1938) 61 CLR 337
(1938) 5 ATD 87
(1938) 1 AITR 403 Kennedy Holdings & Property Management Pty Ltd v. Federal Commissioner of Taxation
(1992) 39 FCR 495
(1992) 92 ATC 4918
(1992) 24 ATR 321
Keywords
Legal action
Legal expenses
Finance charges
Hire purchase
Date reviewed: 12 August 2014
ISSN: 1445-2782
| Date: | Version: | |
| You are here → | 12 September 2002 | Original statement |
| 31 March 2017 | Updated statement |