ATO Interpretative Decision
ATO ID 2002/895 (Withdrawn)
Income Tax
Legal expenses - breach of a contract for sale of businessFOI status: may be released
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This ATO ID is withdrawn. Guidance on the issue contained in this ATO ID can be found in paragraphs 4 and 5 of Taxation Determination TD 2003/15.This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 expenses incurred in pursuing a breach of a contract for sale allowable as a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The legal expenses incurred in pursuing a breach of a contract for sale are not allowable as a deduction under section 8-1 of the ITAA 1997.
Facts
The taxpayer was a member of a partnership that carried on a business. The partners attempted to sell the business. An offer was made for the business and a deposit paid. The offer was withdrawn. Legal expenses were incurred with regard to possible action against the buyer for breach of contract.
Reasons for Decision
Section 8-1 of the ITAA 1997 allows a deduction for all losses or outgoings to the extent that they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, no deduction is allowed to the extent that the losses or outgoings are of a capital, private or domestic nature or are incurred in gaining or producing exempt income.
While the legal expenses were incurred by the taxpayer in connection with their business, legal expenses are often considered by the courts to be capital in nature. In Case AAT Case 5596; AAT Case X3 90 ATC 114; (1989) 21 ATR 3154, two partners operated a business. The partners decided to terminate the business and dispose of the premises. A sale was proceeding until the purchaser withdrew. The partners sought legal advice as to whether they could take action against the purchaser. Senior Member R A Balmford confirmed the Commissioner's submission that the legal expenses were of a capital nature and thus not allowable as a deduction.
The legal expenses were incurred in the sale of the business and are therefore capital in nature. A deduction is precluded by section 8-1 of the ITAA 1997.
Date of decision: 2 July 2002Year of income: Year ended 30 June 2000
Legislative References:
Income Tax Assessment Act 1997
section 8-1
Case References:
AAT Case 5596; AAT Case X3
90 ATC 114
(1989) 21 ATR 3154
Keywords
Deductions & expenses
Legal expenses
ISSN: 1445-2782
| Date: | Version: | |
| 2 July 2002 | Original statement | |
| You are here | 22 August 2014 | Archived |