Edited version of your written advice

Authorisation Number: 1012651451780

Ruling

Subject: Deductibility of legal fees

Questions

1. Are you entitled to a tax deduction in respect of all or part of the legal fees paid by you on behalf of your self-managed superannuation fund (the SMSF)?

2. If the answer to question 1 is no, is any part of the legal fees paid by you tax deductible to the SMSF?

3. Can the SMSF reimburse you for the legal expenses?

Answers

1. No.

2. No.

3. The Commissioner is unable to rule.

This ruling applies for the following periods

The year ending 30 June 2013.

The scheme commences on

1 July 2012.

Relevant facts and circumstances

1. You are a member and a director of the corporate trustee of the Fund which is an SMSF.

2. You were involved in a divorce with your spouse, who is the other member and also a director of the corporate trustee of the Fund. This resulted in the splitting of the Fund.

3. The Fund is in the process of completing the wind-up. A cheque has been issued for a roll-over of your benefits to a new superannuation fund.

4. You personally paid for legal expenses in splitting and winding up the fund, and rolling your interest into the other fund. The legal expenses were incurred for attendances regarding the Fund excluding other property matters in the divorce.

5. There have been no reimbursements from the Fund for the legal expenses you paid.

Relevant legislative provisions

Income Tax Assessment Act 1997 (ITAA 1997) Section 8-1.

Superannuation Industry (Supervision) Act 1993 Section 17A.

Reasons for decision

Summary

1. The legal costs which were incurred by you would not be tax deductible for yourself as they are capital in nature. Similarly, the legal costs which were incurred by you would also not be tax deductible to the Fund.

2. Furthermore, the Fund cannot reimburse you for these costs as they are not considered part of the regular administrative costs incurred by trustees in the maintenance of the Fund.

Detailed reasoning

Nature of legal expenses

1. Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for a loss or an outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature. Therefore, in determining whether a deduction is allowable under section 8-1, the nature of the expense must be considered.

2. In the High Court decision Sun Newspapers Ltd and Associated Newspapers Ltd v. Federal Commissioner of Taxation (Sun Newspapers), Justice Dixon referred to what are now considered guidelines in determining whether a loss or outgoing is of a capital or revenue nature:

There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.

1. In relation to the character of the advantage sought by the expenditure it is necessary to examine whether the expenditure secures an enduring benefit for the business. This test was outlined by the United Kingdom Court of Appeals in British Insulated and Helsby Cables Ltd v. Atherton by Viscount Cave where he stated:

But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.

2. If expenditure produces some asset or advantage of a lasting character for the benefit of the organisation or profit-earning structure it will be considered to be capital expenditure. As stated in Anglo-Persian Oil Co. Ltd. v Dale (Inspector of Taxes) per Justice Rowland and Sun Newspapers per Justice Latham, an enduring benefit does not require that the taxpayer obtain an actual asset, but a benefit which endures, in the way that fixed capital endures.

3. The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses (Hallstroms Pty Ltd v. Federal Commissioner of Taxation). If the advantage to be gained is of a revenue nature, then the expenses incurred in gaining the advantage will also be of a revenue nature.

4. In your case, the splitting of the Fund resulted in the rollover of part of the benefits to your new superannuation fund. This new fund can then be invested and grow to eventually provide a benefit to you. The expenditure has thus produced an advantage of a lasting benefit to you, and hence the legal expenses are considered capital in nature.

Tax deductibility of expense to the individual

5. 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, (Ronpibon Tin NL v. Federal Commissioner of Taxation.

6. Further, legal expenses are generally deductible if the expenses arise out of the day to day activities of the taxpayer's business (Herald and Weekly Times Ltd v. Federal Commissioner of Taxation, and the legal action has more than a peripheral connection to the taxpayer's income producing activities (Magna Alloys and Research Pty Ltd v. Federal Commissioner of Taxation).

7. Your legal expenses are not incurred in gaining or producing assessable income, and the expenses are also considered capital in nature. Accordingly, you are not entitled to a deduction under section 8-1 of the ITAA 1997 for legal expenses incurred in the splitting of the Fund.

Tax deductibility of expense to the Fund

1. The tax deductibility of expenses relating to self-managed superannuation fund was considered in Taxation Ruling TR 93/17 at paragraph 3 under the heading 'General Principles':

Expenditure of a superannuation fund, which is not of a capital, private or domestic nature, is deductible under section 8-1 to the extent that:

(a) it has the essential character of an outgoing incurred in gaining or producing assessable income; or

(b) it has the character of an operating or working expense of a business or is an essential part of the cost of the fund's business operations.

2. It was further commented in TR 93/17 that the deductibility of expenses incurred by a superannuation fund usually depends on whether the expenses are of a capital or revenue nature. As a result, if the Fund had itself incurred these legal expenses in question, it would not be entitled to a tax deduction under section 8-1 of the ITAA 1997. This is because the legal expenses incurred are considered to be capital in nature.