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Edited version of your written advice
Authorisation Number: 1012840892553
Date of advice: 15 July 2015
Ruling
Subject: Legal expenses
Question 1
Are you entitled under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to claim legal expenses incurred during divorce proceedings to obtain your share of property assets?
Answer
No
Question 2
Are you entitled to claim legal expenses incurred during divorce proceedings to obtain your share of property assets as a capital loss?
Answer
No
This ruling applies for the following periods:
Year ended 30 June 2010
Year ended 30 June 2011
Year ended 30 June 2012
Year ended 30 June 2013
Year ended 30 June 2014
Year ended 30 June 2015
The scheme commences on:
The scheme has commenced
Relevant facts and circumstances
You separated from your spouse during the 200XX financial year. You were prevented from receiving your share of salary and rental income, income in a corporate tax savings retirement plan, and the assets of the marriage.
You commenced legal action and incurred legal expenses. You received a share of income and assets during the relevant financial year. You later discovered your former spouse had deliberately prolonged the proceedings.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 110-25
Reasons for decision
Section 8-1 of the 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.
For legal expenses to constitute an allowable deduction, it must be shown that they were incidental or relevant to the production of your 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).
The expenditure must therefore be related to the production of assessable income and not incurred at a point too soon to be deductible (FC of T v. Maddalena (1971) 45 ALJR 426; 2 ATR 541; 71 ATC 4161).
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.
In your case, you incurred legal expenses to obtain assessable income. As there is a direct relationship between the incurring of the expense and the derivation of assessable income, the legal expenses will be deductible under section 8-1 of the ITAA 1997.
You also incurred legal expenses to maintain interests in property. As the maintenance of an ownership interest in property is not a form of assessable income, the legal expenses incurred to maintain these interests are not deductible. It is not important whether the period over which the expenses were incurred was lengthy, or that deliberate delaying tactics have been employed, it is the purpose for which the expenses are incurred which determines whether they are deductible.
Capital Gains Tax
The Capital Gains Tax (CGT) provisions are found in Parts 3-1 and 3-3 of the ITAA 1997. Generally speaking, a capital gain or loss can only occur when a CGT event happens. A capital loss occurs when the taxpayer's costs associated with a CGT event exceed the amounts received from it. In your case, you have incurred legal expenses, however no CGT event has occurred to give rise to a capital gain or loss. You may however be able to include this expenditure in the cost base of the assets you have maintained title to.
Section 110-25 of the ITAA 1997 details the five elements of the cost base of a capital gains tax asset. The fifth element of the cost base is capital expenditure incurred to establish, preserve or defend a taxpayer's title to a CGT asset.
In your case, you have incurred legal expenses in order to preserve your ownership in property assets involved in divorce proceedings. These legal expenses can therefore be included in the cost base of your CGT assets.