ATO Interpretative Decision
ATO ID 2001/322
Income Tax
Legal Expenses and Credit Card ExpensesFOI 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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Are credit card and legal expenses incurred by the taxpayer on behalf of the taxpayer's employer deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No, credit card and legal expenses incurred by the taxpayer on behalf of the taxpayer's employer are not deductible under section 8-1 of the ITAA 1997.
Facts
The taxpayer was employed as a purchasing officer.
The taxpayer was issued with a personal corporate credit card.
The taxpayer used the card to incur expenses on behalf of the employer. These were general expenses, not expenditure for items required for the performance of the taxpayer's duties.
The employer ceased business and the taxpayer was sued by the credit card company for the amount owing on the card.
The taxpayer incurred legal expenses in defending the court action.
The taxpayer settled the court action by paying an amount of money to the credit card company.
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.
It must be considered, therefore, whether the legal and credit card expenses were incurred by the taxpayer in gaining or producing their assessable income.
In Case W101 89 ATC 821; (1989) 20 ATR 3421 a taxpayer obtained a corporate credit card as required by his employer who directed him to charge to the credit card the air fares for three of the companies executives. Before the taxpayer could be reimbursed by the employer for these expenses the company went into receivership. The taxpayer initially resisted the attempts of the credit card company to recover the debt from him, but eventually paid the debt.
The Tribunal disallowed the deduction claimed by the taxpayer for the cost of legal expenses and for the amount of the credit card debt he was required to pay. The outgoings were held not to have been incurred in the course of gaining or producing the taxpayer's assessable income. Rather, it was held that the expense could be regarded as more in the nature of a loan to the company. The circumstances are similar here in that the taxpayer obtained a credit card at the direction of the employer, and then used this card to incur expenditure on behalf of the employer. The expenses were incurred to meet the general expenses of the employer and did not relate directly to the performance of the taxpayer's duties.
There is no evidence that there was any connection between the purchases made and the derivation of the taxpayer's assessable income. The expenditure was not incurred by the taxpayer in order to earn income as an employee. These expenses are therefore not deductible under section 8-1 of the ITAA 1997.
Date of decision: 27 August 2001
Legislative References:
Income Tax Assessment Act 1997
section 8-1
Case References:
Case W101
89 ATC 821
(1989) 20 ATR 3421
Keywords
Work related expenses
Legal expenses
Credit cards
ISSN: 1445-2782