Edited version of private ruling

Authorisation Number: 1011752344670

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Ruling

Subject: Deductibility of legal fees and accounting costs

Question 1

Are legal fees and accounting costs relating to the successful removal of a trustee from the deceased estate deductible?

Answer

No

Relevant facts

Trustees of the deceased estate had difficulty in administering the estate due to certain problems in relation to one of the trustees.. The investment strategy for the estate, payment for accounts and lodgement of tax returns could not be properly attended to due to the trustee's absence.

The remaining trustees then sought legal action to remove that particular trustee of the deceased estate and the removal was successful by the court order.

Individuals were appointed as trustees of the deceased estate. Since their appointment, trustees have invested the funds and the deceased estate is producing assessable income.

The trust seeks a private ruling regarding the deductibility of legal fees and accounting costs relating to the successful removal of one of the trustees from the deceased estate.

Question 1

Detailed reasoning

Section 8-1 of the Income Tax Assessment Act 1997 (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.

For legal expenses to constitute an allowable deduction, it must be shown that they are incidental or relevant to the production of the taxpayer's assessable income (Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431).

Also, 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.

Legal expenses are generally deductible if they arise out of the day to day activities of the taxpayer's business (Herald and Weekly Times Ltd v. Federal Commissioner of Taxation (1932) 48 CLR 113; (1932) 39 ALR 46; (1932) 2 ATD 169) and the legal action has more than a peripheral connection to the taxpayer's income producing activities (Magna Alloys and Research Pty Ltd v. FC of T 80 ATC 4542; (1980) 11 ATR 276).

The legal expenses and accounting costs incurred in removing the particular trustee from the deceased estate were not incurred in the course of gaining or producing the assessable income from the investment. They are expenditures that associated with the carrying out of the functions or duties of trustee. Accordingly, the legal expenses and accounting costs incurred in removing the trustee are not deductible under section 8-1 of the ITAA 1997.

In determining whether the costs of legal expenses are deductible, it is irrelevant whether the taxpayer is successful in those proceedings. The success of removing the trustee from the deceased estate is therefore considered not relevant to this case.