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Edited version of your private ruling
Authorisation Number: 1012419392151
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Ruling
Subject: Deduction-cost of managing tax affairs
Question
Are you entitled to a deduction for your portion of the total legal expenses incurred in relation to settling an audit with the Australian Taxation Office (ATO)?
Answer:
Yes.
Question 2
Are you entitled to a deduction for your portion of the total legal expenses in the income year when the legal fees were invoiced by your solicitor?
Answer:
Yes.
This ruling applies for the following periods:
Year ended 30 June 2010
Year ended 30 June 2011
Year ended 30 June 2012
The scheme commenced on:
1 July 2009
Relevant facts
You are a director of an entity (the entity).
You and the entity were subject to an ATO audit.
You and the entity sought professional taxation advice in relation to the audit.
You and the entity entered into a deed of settlement with the ATO to conclude the audit.
A single billing account was set by your solicitor in the name of the entity where the entity and your legal expenses were invoiced too.
You paid legal expenses to your solicitor.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 25-5
Income Tax Assessment Act 1997 subsection 25-5(1)
Income Tax Assessment Act 1997 subsection 25-5(4)
Income Tax Assessment Act 1997 section 995-1
Income Tax Assessment Act 1936 section 69
Reasons for decision
Section 25-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides a deduction for certain tax related expenses. The expenses incurred in seeking legal advice will be deductible under section 25-5 of the ITAA 1997 if:
· it is for complying with an obligation imposed on the taxpayer by a Commonwealth law that relates to the tax affairs of an entity; and
· the advice is provided by a recognised tax adviser.
Section 995-1 of ITAA 1997 defines tax affairs as affairs relating to tax. Tax means income tax assessed under ITAA 1936 or ITAA 1997 whether imposed by the Income Tax Act 1986 or any other Act.
The definition of tax affairs in ITAA 1997 does not provide any specific examples of expenses that would be covered by this definition. However, Taxation Determination TD 94/92 at paragraph 3 states:
Clause 8 of the Explanatory Memorandum relating to Taxation Laws Amendment Bill (no 5) 1989 indicates that allowable expenditure under subsection 69(2) will include the costs associated with the preparation of an income tax return, in disputing an assessment or determination of the Commissioner of Taxation, attending to a Tax Office audit and with tax planning.
Note: Section 69 of ITAA 1936 is the equivalent of section 25-5 of ITAA 1997.
Subsection 25-5(4) specifically provides that a taxpayer cannot deduct capital expenditure under subsection 25-5(1). However, sub-section 25-5(4) also states that the expenditure is not capital merely because the tax affairs concerned relate to matters of a capital nature.
Apportionment may be required where the expenses incurred relate to the affairs of the taxpayer and another entity (Falcetta v FC of T 2004 ATC 4514). In that case, the taxpayer was a shareholder and director of a company. He incurred tax agent fees that related to both his personal tax affairs and the tax affairs of the company. It was held that the fees, to the extent that they related to the preparation of tax returns for the taxpayer himself or for the company of which he was public officer, were deductible.
Similarly in your case, you and the entity were subject to an ATO audit. You and the entity sought legal advice from your solicitor in relation to the ATO audit. As the requirements of section 25-5 of the ITAA 1997 are satisfied, a deduction is allowed under section 25-5 of the ITAA 1997, for the portion of the legal expenses directly related to the ATO auditing of your tax affairs.
A deduction can be claimed in the income year when the legal expenses were invoiced by your solicitors to the entity.
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