ATO Interpretative Decision

ATO ID 2002/1081

Income tax

Legal expenses - to establish rights to intellectual property
FOI status: may be released
  • This document has changed over time. View its history.

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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for legal expenses incurred in establishing their rights in relation to written materials authored by them?

Decision

No. The taxpayer is not entitled to a deduction under section 8-1 of the ITAA 1997 for legal expenses incurred in establishing their rights in relation to written materials authored by them.

Facts

The taxpayer is an employee.

The taxpayer authored written materials for use in their employment.

The taxpayer's employer proposed selling the materials to another person.

The taxpayer incurred legal expenses in seeking legal advice to establish their rights in relation to the written materials.

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.

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] HCA 34; (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. If the advantage to be gained is of a capital nature, then the expenses incurred in gaining the advantage will also be of a capital nature.

Legal expenses may be of a revenue nature and therefore deductible if they arise out of the day to day activities of the taxpayer's business or income producing activity (Herald and Weekly Times Ltd v. Federal Commissioner of Taxation (1932) 48 CLR 113; [1932] HCA 56; (1932) 2 ATD 169). Where however, expenditure is devoted towards a structural rather than an operational purpose, the expenditure is of a capital nature and the expenses are not deductible (Sun Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; [1938] HCA 73; (1938) 5 ATD 87; (1938) 1 AITR 403).

Outgoings incurred in the preservation of an existing capital asset have been held to be capital in nature (John Fairfax & Sons Pty Limited v. Federal Commissioner of Taxation (1959) 101 CLR 30; [1959] HCA 4; (1959) 7 AITR 346; (1959) 11 ATD 510).

The taxpayer incurred legal expenses in seeking advice to establish their rights in relation to the written materials authored by them. The advantage sought to be obtained by seeking legal advice was to establish their right to the materials. The legal expenses are capital in nature as they relate to the asset rather than the derivation of income from that asset.

Accordingly, as the legal expenses incurred by the taxpayer are of a capital nature, a deduction is not allowable under section 8-1 of the ITAA 1997.

Amendment History

Date of amendment Part Comment
20 June 2014 Reasons for decision Updated to add medium neutral case citation
Case references Updated to add medium neutral case citation
Related ATO IDs Updated to include related ATO ID
Legislative References Updated

Date of decision:  21 November 2002

Year of income:  Year ended 30 June 2001

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

Case References:
Hallstroms Pty Ltd v. Federal Commissioner of Taxation
   (1946) 72 CLR 634
   [1946] HCA 34
   (1946) 3 AITR 436
   (1946) 8 ATD 190

Herald & Weekly Times Ltd v. Federal Commissioner of Taxation
   (1932) 48 CLR 113
   [1932] HCA 56
   (1932) 2 ATD 169

Sun Newspapers Limited v. Federal Commissioner of Taxation
   (1938) 61 CLR 337
   [1938] HCA 73
   (1938) 1 AITR 403
   (1938) 5 ATD 87

John Fairfax & Sons Pty Limited v. Federal Commissioner of Taxation
   (1959) 101 CLR 30
   [1959] HCA 4
   (1959) 7 AITR 346
   (1959) 11 ATD 510

Related ATO Interpretative Decisions
ATO ID 2007/136

Keywords
Capital expenditure
Intellectual property rights
Legal expenses
Ownership, interests, control & rights

Business Line:  Small Business/Individual Taxpayers

Date of publication:  30 November 2002

ISSN: 1445-2782

history
  Date: Version:
  21 November 2002 Original statement
You are here 20 June 2014 Original statement