ATO Interpretative Decision

ATO ID 2002/768

Income Tax

Legal Expenses - preparing a loan agreement
FOI status: may be released
Status of this decision: Decision Current
CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

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If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Is the taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for legal expenses incurred in drawing up a loan agreement?

Decision

No. The taxpayer is not entitled to a deduction under section 8-1 of the ITAA 1997 for legal expenses incurred in drawing up a loan agreement.

Facts

The taxpayer made a loan to a company at commercial interest rates.

The loan is secured by a mortgage over commercial premises.

The taxpayer engaged a solicitor to draw up a loan agreement that would protect their interests.

The taxpayer incurred legal expenses in relation to this matter.

Reasons for Decision

Section 8-1 of the 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.

The courts have considered the meaning of 'incurred in gaining or producing assessable income'. In 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 High Court stated that:    


'For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The words "incurred in gaining or producing the assessable income" mean in the course of producing such income.'

The expenditure must therefore be related to the production of assessable income and not be incurred at a point too soon to be deductible (FC of T v. Maddalena (1971) 2 ATR 541; 71 ATC 4161).

The legal expenses incurred by the taxpayer to draw up the loan agreement were not incurred in the course of gaining or producing the assessable income from the investment. The expenditure occurred at a point too soon to be part of the income producing process. It is expenditure that is associated with putting the income earning investment in place. Accordingly, the legal expenses incurred by the taxpayer are not deductible under section 8-1 of the ITAA 1997.

Date of decision:  18 April 2002

Year of income:  Year ending 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   section 8-1

Case References:
Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation
   (1949) 78 CLR 47
   (1949) 4 AITR 236
   (1949) 8 ATD 431

FC of T v. Maddalena
   (1971) 2 ATR 541
   71 ATC 4161

Keywords
Deductions & expenses
Legal action
Legal expenses

Business Line:  Small Business/Individual Taxpayers

Date of publication:  31 July 2002

ISSN: 1445-2782