ATO Interpretative Decision
ATO ID 2007/136
Income Tax
Legal expenses: shareholder resisting further share issueFOI status: may be released
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
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 opposing a further share issue in a company in which the taxpayer owns shares?
Decision
No. The taxpayer is not entitled to a deduction under section 8-1 of the ITAA 1997 for legal expenses incurred in opposing a further share issue in a company in which the taxpayer owns shares.
Facts
The taxpayer owns shares in a Company A.
Company A undertook an expansion of capital by offering shares to the existing membership.
The first dividend declared after this share issue resulted in the taxpayer receiving less dividend income than would have been received based on the shareholding prior to the new issue.
The taxpayer took legal action against the company and the board of directors in order to void the share issue.
The court validated the share issue.
The taxpayer incurred legal expenses during the court proceedings.
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 to stop a further share issue by the company in which the taxpayer owns shares. The advantage sought to be obtained by pursuing the legal action was to preserve the taxpayer's existing equity interest in the company, being the taxpayer's existing proportion of the company's total issued shares, and the enduring benefit that attaches to that equity interest. The legal expenses are accordingly capital in nature.
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.
Date of decision: 25 June 2007Year of income: Year ended 30 June 2006
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. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation
(1938) 61 CLR 337
(1938) 5 ATD 23
(1938) 1 AITR 403 John Fairfax & Sons Pty Ltd v. Federal Commissioner of Taxation
(1959) 101 CLR 30
(1959) 11 ATD 510
(1959) 7 AITR 346
Related Public Rulings (including Determinations)
Taxation Determination TD 93/29
ATO ID 2001/4
ATO ID 2001/42
ATO ID 2002/1081
ATO ID 2003/315
ATO ID 2004/214
Keywords
Capital expenditure
Deductions & expenses
Legal expenses
Shareholders
ISSN: 1445-2782
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