ATO Interpretative Decision

ATO ID 2002/814

Income Tax

Deductibility of accounting and legal fees
FOI status: may be released
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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.

This ATOID provides you with the following level of protection:

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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

Whether accounting and legal fees incurred in appealing to the Federal Court on a Sales Tax dispute are deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA1997).

Decision

Yes. Accounting and legal fees incurred in appealing to the Federal Court on a Sales Tax dispute are deductible under section 8-1 of the ITAA 1997.

Facts

The taxpayer manufactures two types of plant.

The taxpayer maintained that sales tax was not payable on any sales of the plant.

The taxpayer was subsequently audited by the ATO resulting in an amended assessment issuing.

The taxpayer lodged a Notice of Objection against the assessment.

The objection was disallowed.

The taxpayer appeared before the AAT who confirmed the ATO decision.

The taxpayer then lodged an appeal with the Federal Court.

In an out of Court settlement it was agreed that the taxpayer would pay a substantially lesser amount of sales tax than was originally claimed by the ATO.

The taxpayer incurred accounting and legal fees in respect of this matter.

Reasons for Decision

Apart from the deductibility under specific provisions of the tax law, the deductibility of accounting and legal expenses is to be considered under section 8-1 of the ITAA 1997.

Accounting and legal expenses which are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income (paragraph 8 1(1)(b) of the ITAA 1997) and are not of a capital nature, or do not fall within any of the other exceptions in subsection 8-1(2), are deductible.

Where a taxpayer is carrying on a business, the cost of preparing a return for any business-related tax such as sales or payroll tax is deductible under section 8-1 of the ITAA 1997 as that cost can be reasonably seen as desirable or appropriate in pursuit of the taxpayer's business objectives in earning assessable income (Magna Alloys & Research Pty Ltd v. FC of T (1980) 49 FLR 183; [1980] FCA 150; (1980) 11 ATR 276; 80 ATC 4542). The cost of objecting or appealing against any resulting assessment is also deductible. The cost of obtaining professional advice on matters relating to these taxes would also be deductible.

Objecting against a sales tax assessment would meet the test for deductibility referred to above. Therefore, the taxpayer is entitled to a deduction for the accounting and legal expenses they have incurred.

This decision is supported by the decision of the Federal Court in Jezareed Pty Ltd v. FC of T (1989) 23 FCR 529; [1989] FCA 150; (1989) 20 ATR 683; 89 ATC 4459 where a retail motor trader was allowed a deduction of nearly $500,000 in fees paid for advice and administrative work in relation to a sales tax minimisation scheme.

Amendment History

Date of Amendment Part Comment
3 July 2015 Reasons for Decision Case references updated
Case references Updated

Date of decision:  5 April 2002

Year of income:  Year ended 30 June 2001

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

Case References:
Jezareed Pty Ltd v. Federal Commissioner of Taxation
   (1989) 23 FCR 529
   [1989] FCA 150
   20 ATR 683
   89 ATC 4459

Magna Alloys & Research Pty Ltd v. FC of T
   (1980) 49 FLR. 183
   [1980] FCA 150
   (1980) 11 ATR 276
   80 ATC 4542

Keywords
Accounting expenses
Legal expenses
Precedent

Business Line:  Small Business/Individual Taxpayers

Date of publication:  22 August 2002

ISSN: 1445-2782

history
  Date: Version:
  5 April 2002 Original statement
You are here 3 July 2015 Updated statement