ATO Interpretative Decision

ATO ID 2002/207

Income Tax

Legal expenses incurred by executor of deceased estate
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

Are legal expenses incurred by an executor of a deceased estate in defending an action against a will deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. An executor of a deceased estate cannot claim legal expenses incurred in defending an action against a will as a deduction under section 8-1 of the ITAA 1997.

Facts

The will of a deceased person nominated the taxpayer as the executor of the estate.

The will provided for distributions to be made to specific beneficiaries.

The will was contested by several beneficiaries as to their entitlements.

The taxpayer as executor:

·
engaged legal representation to defend the action against the will
·
incurred substantial legal expenses to defend the action.

The matter was resolved through the court mediation process resulting in increased distributions to certain beneficiaries.

Reasons for Decision

Section 8-1 of 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.

The courts have considered the meaning of 'incurred in gaining or producing assessable income'. In Ronpibon Tin NL & Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; [1949] HCA 15; (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 be related to the production of assessable income. The legal expenses incurred were not for the purpose of producing assessable income of the estate but for determining the beneficiaries correct entitlement to distributions of the corpus of the estate. The taxpayer is therefore not entitled to a deduction under section 8-1 of the ITAA 1997 for legal expenses incurred in defending an action against the will.

Amendment History

Date of Amendment Part Comment
13 March 2015 Facts Updated for clarity
Reasons for Decision Updated citation
Case References Updated citation
Related ATO Interpretative Decisions Insert related ATO ID

Date of decision:  12 October 2001

Year of income:  Year ended 30 June 2001

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

Case References:
Ronpibon Tin NL & Tongkah Compound NL v. Federal Commissioner of Taxation
   (1949) 78 CLR 47
   [1949] HCA 15
   (1949) 8 ATD 431

Related ATO Interpretative Decisions
ATO ID 2003/705

Keywords
Legal expenses
Deceased estate
Executors

Siebel/TDMS Reference Number:  DW302556; 1-6AZZDF8

Business Line:  Small Business/Individual Taxpayers

Date of publication:  28 February 2002

ISSN: 1445-2782

history
  Date: Version:
  12 October 2001 Original statement
You are here 13 March 2015 Updated statement