ATO Interpretative Decision
Income TaxDeductions and expenses: Legal expenses in recovery of misappropriated funds
FOI status: may be released
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Status of this decision: Decision Current
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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.
Are legal expenses incurred in attempting to recover misappropriated funds deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?
No. Legal expenses incurred in attempting to recover misappropriated funds are not deductible under section 8-1 of the ITAA 1997.
A taxpayer who is an employee of a unit trust pays $50,000 for units in the trust. The person to whom the payment is made (a principal in the business) misappropriates the money; the money is never transferred to the trust. The taxpayer incurs legal expenses in attempting to recover the misappropriated funds.
Reasons for Decision
In determining whether a deduction is allowed under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered ( Hallstroms Pty Ltd v FC of T (1946) 72 CLR 634; 8 ATD 190 per Dixon J). The nature or character of the legal expenses follows the advantage which is sought to be gained by incurring the expenses.
Where the legal expenses arise as a consequence of the day to day activities of a business, the object of the expenditure is devoted towards a revenue end and the legal expenses are deductible ( Herald & Weekly Times v FC of T 48 CLR 113; 2 ATD 169). Where, however, the expenditure is devoted towards a structural rather than operational purpose, the expenditure is of a capital nature and the expenses are not deductible ( Sun Newspapers Ltd v FC of T (1938) 61 CLR 337; 5 ATD 87).
The taxpayer has incurred legal expenses to recover money misappropriated by a principal of the business. The legal fees were incurred by the taxpayer in his capacity as an investor with the object of recovering invested capital. As such, the legal expenses are of a capital nature and are not deductible under section 8-1 of the ITAA 1997.
|Date of amendment||Part||Comment|
|11 April 2014||Issue||Update reference to subsection 51(1) ITAA 1936 to section 8-1 of the ITAA 1997.|
|Reasons for Decision||Update reference to subsection 51(1) ITAA 1936 to section 8-1 of the ITAA 1997.|
|Legislative References||Update reference to subsection 51(1) ITAA 1936 to section 8-1 of the ITAA 1997.|
Income Tax Assessment Act 1997
Herald & Weekly Times Ltd v FC of T
48 CLR 113
2 ATD 169
(1946) 72 CLR 634
8 ATD 190 Sun Newspapers Ltd v FC of T
(1938) 61 CLR 337
5 ATD 87
Deductions and expenses