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Ruling

Subject: Legal Expenses in relation to a Coronial Enquiry

Question 1

Are legal expenses incurred in relation to a coronial enquiry allowable in terms of section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Are legal expenses incurred in relation to a coronial enquiry allowable in terms of section 40-880 of the ITAA 1997?

Answer

Not Applicable

Question 3

Are legal expenses incurred in relation to a coronial enquiry allowable as a deduction under any other section of the ITAA 1997?

Answer

Not applicable

This ruling applies for the following period

1 July 2010 to 30 June 2014

The scheme commenced on

1 July 2010

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Relevant facts

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

A contractor and an employee of a company died as the result of an accident which happened at the company's normal place of business.

As a result of the deaths a coronial inquest into the accident took place.

Representatives of the company were subpoenaed to appear at the coronial inquest.

The Company incurred legal fees in preparation of its submission to the coronial inquest.

Reasons for decision

Question 1

Summary

The legal expenses which the company has incurred in relation to the coronial inquest are deductible under section 8-1 of the ITAA 1997.

Detailed reasoning

For a deduction to be allowed under the first limb of section 8-1 of the ITAA 1997 the Commissioner must determine whether the legal expenses can be said to have been necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

Legal expenses are generally deductible if the legal action:

• arose out of, or concerned the day to day income producing activities of the taxpayer (Herald and Weekly Times Ltd v. Federal Commissioner of Taxation (1932) 48 CLR 113; (1932) 39 ALR 46; (1932) 2 ATD 169 (Herald and Weekly Times Ltd Case))
• is not undertaken to protect the taxpayer's profit yielding subject
• has more than a peripheral connection to the taxpayer's business (Magna Alloys and Research Pty Ltd v. Commissioner of Taxation (1980) 49 FLR 183; (1980) 11 ATR 276; 80 ATC 4542; (1980) 33 ALR 213 (Magna Alloys Case); Putnin v. Commissioner of Taxation (1991) 27 FCR 508; 91 ATC 4097; (1991) 21 ATR 1245 (Putnin's Case)
• may arise out of litigation concerning the taxpayer's professional conduct (Magna Alloys Case and Putnin's Case).

Once the first limb of section 8-1 of the ITAA 1997 is satisfied it must be determined whether the expense is of a revenue or capital nature therefore the exact nature of the expenditure must be considered. In Hallstroms Pty Ltd v. FC of T (1946) 72 CLR 634, Dixon J at 647 stated that

…legal expenses ... take the quality of an outgoing of a capital nature or of an outgoing on account of revenue from the cause or purpose of incurring the expenditure. We are, therefore, remitted to a consideration of the object in view when the legal proceedings were undertaken, or of the situation which impelled the taxpayer to undertake them.

Application to the taxpayer's circumstances

The incident occurred as a result of a contractor carrying out regular maintenance on equipment. A coronial inquest has been held into the deaths. Representatives of the company were subpoenaed to appear at the inquest therefore significant legal expenditure was incurred by the company defending itself and making submissions to the inquest.

The deaths resulting from the accident which occurred on the business premises during the course of carrying on the business were an incident of the business being carried on. Therefore the legal expenses arising from the coronial inquest are expenses incurred in the carrying on of that business and not incurred to gain an enduring benefit to the company, or in the protection of the underlying profit yielding structure.

Accordingly, it is concluded that the legal expenses are revenue in nature and can be claimed as a deduction under section 8-1 of the ITAA 1997.

Question 2

Summary

As the answer to question 1 is 'Yes', deductibility under section 40-880 of ITAA 1997 will not be further considered.

Detailed reasoning

Section 40-880 applies to make certain business capital expenditure deductible over time. Subsection 40-880(1) sets out the object of this section is to make certain business capital expenditure deductible over 5 years if:

(a) the expenditure is not otherwise taken into account; and

(b) a deduction is not denied by some other provision; and

(c) the business is, was or is proposed to be carried on for a taxable purpose.

As it has been determined that the company can claim a deduction for legal expenses under section 8-1 of the ITAA 1997, section 40-880 of the ITAA 1997 does not apply.

Question 3

Summary

As the answer to Question 1 is 'Yes' deductibility under any other section of the ITAA 1997 is not applicable.