Private ruling: Legal expenses incurred in relation to the recovery of invested moneys
Published: August 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to claim legal expenses incurred in an attempt to recover money invested with The ATP? | A1: No.

Relevant facts and circumstances: You paid an investor to trade on your behalf, who was to trade with XX. You were advised the investment would make a good return, however the investment produced a significant loss. Following this loss, you withdrew your money from XX and undertook court proceedings to recover the principle amount. After seeking legal advice through many channels, the investor refunded the principle amount to settle the dispute. Upon settlement prior to the court hearing, you withdrew your application with the court. You were advised your payment for the daily hearing fee was non-refundable.

Relevant legislative provisions: Income Tax Assessment Act 1997 (ITAA 1997) section 8-1

Reasons for decision: Summary: Broadly, section 8-1 of the ITAA 1997 allows a deduction for losses and outgoings to the extent they are incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, a deduction is not allowed under section 8-1 of the ITAA 1997 if the loss or outgoing is of a capital, private or domestic nature, or is incurred in producing exempt income or where another provision of the ITAA 1997 prevents a deduction The deductibility of an outgoing is determined by its essential character ( Lunney v. Federal Commissioner of Taxation (1958) 100 CLR 478; (1958) 11 ATD 404; (1958) 7 ATR 166). The nature or character of legal expenses follows the advantage which was sought to be gained by incurring the legal expenses ( Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 8 ATD 190; (1946) 3 AITR 436 ( Hallstroms )). It is irrelevant whether the legal action is successful or not. It is the nature and character of the expense and the advantage to be gained by incurring it that is important. If the outcome sought by the legal action is revenue in nature then the legal expenses will also be revenue in nature. Similarly, if the advantage sought is capital in nature the expenses will also be capital in nature. In your case, you incurred legal fees with the court whilst attempting to recover money invested with an investor. Legal fees incurred with the object of recovering invested monies are not deductible as they are considered capital in nature. This is because the legal expenses are not a recurring operational type expense and also secure an enduring benefit, that is, the recovery of the said monies. Therefore, you are not entitled to a deduction for the legal expenses you have incurred as this expense is considered to be capital in nature.