| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your private ruling
Authorisation Number: 1012482463654
Ruling
Subject: legal expenses
Question
Are you entitled to a deduction for legal expenses?
Answer
No.
This ruling applies for the following periods
Year ended 30 June 2012
Year ended 30 June 2013
Year ended 30 June 2014
The scheme commenced on
1 July 2011
Relevant facts
Your relation died.
All jointly held cash investments were transferred to you.
In the relevant income year you were assessed on all the interest income from the cash investments. You will also be assessed on the interest income from the cash investments in the subsequent income year.
The deceased's will was challenged and resulted in a legal battle.
You incurred legal costs in defending your ownership of the cash investments.
All court and legal costs of both parties were ruled to be paid from the notional estate and not the deceased estate. The notional estate was deemed to be the cash investments held in your name.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1.
Reasons for decision
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.
A number of significant court decisions have determined that for an expense to be an allowable deduction:
§ it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. FC of T; (1958) 100 CLR 478),
§ there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. FC of T, (1949) 78 CLR 47), and
§ it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore Co (WA) Pty Ltd v. FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).
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. 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. 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.
If the advantage sought is ownership in an asset or a right or an advantage with an enduring benefit, then the expenses take on the character of capital expenditure.
The courts have established guidelines for distinguishing between capital and revenue outgoings. In Sun Newspapers Ltd and Associated Newspapers Ltd v. FC of T (1936) 61 CLR 337; (1938) 45 ALR 10; (1983) 1 AITR 403; 5 ATD 87, three elements were identified as being relevant:
§ the nature of the advantage sought
§ the way it is to be used or enjoyed
§ the means adopted to get it.
Legal expenses incurred in order to protect and determine the correct entitlements to the distribution of the corpus of a deceased estate are capital in nature. Furthermore, such expenses would not be allowable as a deduction under section 8-1 of the ITAA 1997 as they are not incurred in gaining or producing assessable income.
In your case, you incurred legal expenses to establish your entitlement to the cash investments after the will was challenged. Although the cash investments enable you to derive assessable interest income, the legal action taken to defend your entitlement to these cash investments does not have the necessary connection with your assessable income.
You incurred legal expenses in relation to defending your ownership in the cash investments rather than for the purposes of the deriving interest income from those investments. Accordingly, your legal expenses are of a capital nature and are not deductible under section 8-1 of the ITAA 1997.
It is acknowledged that the legal expenses were paid from the cash investments and not the deceased estate. However, this does not change the capital nature of the expenses. Therefore, no deduction is allowable for the legal expenses incurred.