ATO Interpretative Decision

ATO ID 2004/831

Income tax

Deductions: expenses incurred by director in complying with penalty notice
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.

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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

Is the taxpayer, a company director, allowed a deduction, under section 25-5 of the Income Tax Assessment Act 1997 (ITAA 1997), for the expenses incurred in seeking legal advice regarding a penalty notice issued to the taxpayer under section 222AOE of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision

Yes. The taxpayer, a company director, is allowed a deduction, under section 25-5 of the ITAA 1997, for the expenses incurred in seeking legal advice regarding a penalty notice issued to the taxpayer under section 222AOE of the ITAA 1936.

Facts

The taxpayer is the managing director of a company that has failed to pay amounts, withheld under the PAYG provisions of the Taxation Administration Act 1953, to the Tax Office. The Tax Office issued a penalty notice to the taxpayer under section 222AOE of the ITAA 1936 regarding the unpaid PAYG withholding debts of the company.

The taxpayer incurred expenses in seeking legal advice from a legal practitioner regarding the penalty notice issued to the taxpayer. The legal advice sought by the taxpayer was related solely to the effect of the penalty notice and the actions the taxpayer should take to comply with the notice.

Reasons for Decision

Section 25-5 of the ITAA 1997 provides a deduction for certain tax related expenses. Paragraph 25-5(1)(b) of the ITAA 1997 provides a deduction for expenditure incurred to the extent that it is for complying with an obligation imposed by a Commonwealth law, insofar as that obligation relates to the tax affairs of an entity. Where expenditure is incurred for advice about the operation of a Commonwealth law relating to taxation, paragraph 25-5(2)(e) of the ITAA 1997 further requires that such advice must be provided by a recognised tax adviser.

In this case, the taxpayer incurred expenses in seeking legal advice regarding the penalty notice issued under section 222AOE of the ITAA 1936 regarding the unpaid PAYG withholding debts of the company. The expenses incurred in seeking the legal advice will be deductible under section 25-5 of the ITAA 1997 if:

·
it is for complying with an obligation imposed on the taxpayer by a Commonwealth law that relates to the tax affairs of an entity; and
·
the advice is provided by a recognised tax adviser.

The penalty notice issued under section 222AOE of the ITAA 1936 imposed an obligation on the taxpayer to take certain actions or otherwise be liable for the unpaid amount of the PAYG withholding debts of the company. It is considered that legal advice sought in relation to this penalty notice is for complying with an obligation imposed by a Commonwealth law.

Section 995-1 of the ITAA 1997 defines 'tax affairs' as affairs relating to 'tax'. 'Tax' is then further defined as meaning income tax as assessed under the income tax assessment acts.

The question to be answered, in determining whether the first criteria mentioned above is satisfied, is whether this definition is broad enough to include matters relating to PAYG withholding.

It was held by Hill J in Bartlett v. Federal Commissioner of Taxation; Falcetta v. Federal Commissioner of Taxation [2003] FCA 1125; 2003 ATC 4962; (2003) 54 ATR 261 that the expression 'tax affairs' used in section 69 of the ITAA 1936 (the predecessor of section 25-5 of the ITAA 1997) included not only income tax itself but also ancillary taxes such as provisional tax, group tax and prescribed payments which collect income tax during the year. Hill J also stated that such taxes would be included in the meaning of 'tax affairs' as used in section 25-5 of the ITAA 1997 prior to 22 December 1999 when that term was not defined in the Act. This finding was not questioned on appeal (see Falcetta and Anor v. Federal Commissioner of Taxation [2004] FCAFC 117; 2004 ATC 4514; (2004) 56 ATR 59).

The current definition of 'tax affairs' in the ITAA 1997 does not disturb this reasoning. There does not appear to have been any intention on the part of the legislature to narrow the meaning of the term by use of the new definition. Therefore, ancillary taxes that are used to collect income tax, such as the PAYG withholding and the PAYG instalment systems, are included within the definition of 'tax affairs'. Therefore, the first criterion mentioned above is satisfied.

Section 995-1 of the ITAA 1997 defines 'recognised tax adviser' to mean a registered tax agent or a legal practitioner. Therefore, as the taxpayer sought legal advice from a legal practitioner the second requirement mentioned above is satisfied.

As the requirements of section 25-5 of the ITAA 1997 are satisfied, a deduction is allowed under section 25-5 of the ITAA 1997, for expenses incurred in seeking legal advice regarding the penalty notice issued under section 222AOE of the ITAA 1936.

Date of decision:  28 July 2003

Year of income:  Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   section 25-5
   paragraph 25-5(1)(b)
   paragraph 25-5(2)(e)
   section 995-1

Income Tax Assessment Act 1936
   section 222AOE

Case References:
Bartlett v. Federal Commissioner of Taxation; Falcetta v. Federal Commissioner of Taxation
    [2003] FCA 1125
   2003 ATC 4962
   (2003) 54 ATR 261

Falcetta and Anor v. Federal Commissioner of Taxation
    [2004] FCAFC 117
   2004 ATC 4514
   (2004) 56 ATR 59

Keywords
Deductions & expenses
Directors penalty
Legal expenses

Business Line:  Small Business/Individual Taxpayers

Date of publication:  15 October 2004

ISSN: 1445-2782