Edited version of private advice

Authorisation Number: 1051728260076

Date of advice: 17 August 2020

Ruling

Subject: Work related expenses - professional fees

Question

Are you entitled to a deduction for professional fees incurred to protect your right to continue working in your field of expertise?

Answer

No.

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts and circumstances

You operated your own business as a sole trader in your field of expertise.

You wound down your business operations and are working in the same field of work as an employee.

You encountered business difficulties when operating your business as a sole trader, which caused significant delays in the lodgment of your income tax returns and business activity statements.

You caught up with your lodgments which resulted in a large debt being owed to the ATO.

The ATO commenced legal proceedings to recover the outstanding tax debt.

You engaged the services of professionals who are not recognised tax advisers in order to avoid bankruptcy and to protect your right to continue working in your field of expertise.

You incurred professional fees to assist with the matter.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 25-5

Reasons for decision

You can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income or is necessarily incurred in carrying on a business for that purpose. However, you cannot deduct a loss or outgoing to the extent that it is capital, private or domestic in nature, or relates to the earning of exempt income (section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)).

You can also deduct from your assessable income an amount that a provision of the Income Tax Assessment Act 1936 or ITAA 1997 (outside of Division 8) allows you to deduct (section 8-5 of theITAA 1997).

Section 12-5 of the ITAA 1997 provides a summary list of provisions about deductions. Included in this list is section 25-5 which is about tax-related expenses.

You can deduct expenditure you incur to the extent that it is for managing your tax affairs (paragraph 25-5(1)(a) of the ITAA 1997) or for complying with an obligation imposed on you by a Commonwealth law, insofar as that obligation relates to the tax affairs of an entity (paragraph 25-5(1)(b) of the ITAA 1997).

However, you cannot deduct capital expenditure (subsection 25-5(4) of the ITAA 1997) or a fee or commission for advice about the operation of a Commonwealth law relating to taxation, unless that advice is provided by a recognised tax adviser (paragraph 25-5(2)(e) of the ITAA 1997).

'Tax affairs' means affairs relating to tax (section 995-1 of the ITAA 1997). 'Tax' means income tax imposed by the Income Tax Act 1986, as assessed under the ITAA 1997, or income tax imposed as such by any other Act, as assessed under the ITAA 1997.

Application to your circumstances

In your case, you incurred expenditure to avoid bankruptcy so that you could continue working in your field of expertise. The right to practice a profession (whether as an employee or in a business) is a capital asset, and expenditure incurred to protect such a right or capital asset is capital in nature.

For example, in Case V140 88 ATC 874; AAT Case 4596 (1988) 19 ATR 3859, a solicitor was denied a deduction for legal expenses incurred in defending certain allegations before the Statutory Committee of the Law Society of New South Wales, concerning the solicitor's trust account. The Committee ordered the taxpayer be suspended from practice for a period of twelve months, and to pay the costs of the Law Society. The Administrative Appeals Tribunal (AAT) held that the payments made by the taxpayer were not deductible as the payments were characterised as capital expenditure.

Similarly, in Case X84 90 ATC 609; AAT Case 6528 (1990) 21 ATR 3721, the AAT held that legal expenses incurred by a medical practitioner in defending charges brought against him at a Medical Disciplinary Tribunal inquiry, were not deductible because the expenditure was incurred to protect a structural asset, that is, their registration as a medical practitioner, and was of a capital nature.

Expenditure of a capital nature is not deductible under section 8-1 or section 25-5 of the ITAA 1997. In addition, the fees were not paid to a recognised tax adviser and were paid in relation to advice about an outstanding debt and not in managing your tax affairs. As such, you are not entitled to a deduction for the professional fees you paid to avoid bankruptcy so that you could continue working in your field of expertise.