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Edited version of your private ruling
Authorisation Number: 1012566585597
Ruling
Subject: Deduction for legal expenses
Question
Are you entitled to claim a deduction for legal expenses?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2013
The scheme commenced on
I July 2012
Relevant facts
You entered into a contract with a company to provide you with a commercial quantity of X. You were to undertake a commercial activity involving X. You paid a deposit and delivery date was agreed.
The delivery of the X did not happen as arranged and you cancelled the contract. You commenced action in the Court to recover your deposit. The other party cross claimed for damages and loss due to you cancelling the contract.
You pursued your claim for return of the deposit and defended the cross claim against you for damages and loss. The court ruled in your favour and ordered the other party to return your deposit and reimburse you for your legal costs.
This did not happen so you incurred further legal costs to recover your deposit and legal expenses.
Later the other company was placed into voluntary administration. You have registered as an unsecured creditor with the administrator; however there will be no funds available for distribution by the administrator.
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, or relate to the earning of exempt income.
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 or business operations. 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.
In your situation, the legal expenses incurred are in relation to the acquisition of a capital asset (X). As the advantage sought is of a capital nature, the legal expenses are also capital and not deductable under section 8-1 of the ITAA 1997.