ATO Interpretative Decision

ATO ID 2002/1081

income tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is the taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for legal expenses incurred in establishing their rights in relation to written materials authored by them?

Decision

No. The taxpayer is not entitled to a deduction under section 8-1 of the ITAA 1997 for legal expenses incurred in establishing their rights in relation to written materials authored by them.

Facts

The taxpayer is an employee.

The taxpayer authored written materials for use in their employment.

The taxpayer's employer proposed selling the materials to another person.

The taxpayer incurred legal expenses in seeking legal advice to establish their rights in relation to the written materials.

Reasons for Decision

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which 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 for legal expenses 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) 3 AITR 436; (1946) 8 ATD 190). The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses. If the advantage to be gained is of a capital nature, then the expenses incurred in gaining the advantage will also be of a capital nature.

Legal expenses may be of a revenue nature and therefore deductible if they arise out of the day to day activities of the taxpayer's business or income producing activity (Herald and Weekly Times Ltd v. Federal Commissioner of Taxation (1932) 48 CLR 113; (1932) 2 ATD 169). Where however, 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).

Outgoings incurred in the preservation of an existing capital asset have been held to be capital in nature (John Fairfax & Sons Pty Limited v. Federal Commissioner of Taxation (1959) 101 CLR 30; (1959) 7 AITR 346; (1959) 11 ATD 510).

The taxpayer incurred legal expenses in seeking advice to establish their rights in relation to the written materials authored by them. The advantage sought to be obtained by seeking legal advice was to establish their right to the materials. The legal expenses are capital in nature as they relate to the asset rather than the derivation of income from that asset.

Accordingly, as the legal expenses incurred by the taxpayer are of a capital nature, a deduction is not allowable under section 8-1 of the ITAA 1997.

Year of income:  Year ended 30 June 2001

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

Keywords
Capital expenditure
Intellectual property rights
Legal expenses
Ownership, interests, control & rights

Siebel/TDMS Reference Number:  DW459998

Business Line:  Small Business/Individual Taxpayers

Date of publication:  30 November 2002

ISSN: 1445-2782