Private ruling: Deductibility of legal expenses
Date of advice: 17 October 2018
Published: December 2018
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are the legal expenses you incurred deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No

Relevant facts and circumstances: You operated a professional services business. You decided to sell your business and obtained an offer from a purchaser. A term of the offer was that you must continue on in the business in your professional capacity. You received a letter to terminate your status in a professional association. The purchaser withdrew their offer as a result of termination letter. You initiated a dispute regarding the termination in which you incurred legal fees. As a result of the dispute, you were able to maintain your status with the professional association.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 Detailed reasoning | You can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income. You can also deduct a loss or outgoing that is necessarily incurred in carrying on of a business for the purpose of gaining or producing assessable income. However, you cannot deduct a loss or outgoing to the extent that it is capital or of a capital nature (see section 8-1 of the ITAA 1997). | Legal expenses may be either of a revenue or capital depending on the purpose for which they are incurred. Where the expenditure is incurred to preserve the profit making structure it is of a capital nature and not deductible ( Sun Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; (1938) 5 ATD 87; (1938) 1 AITR 403). | The Commissioner’s view is that the taxpayer’s right to practise a professional service is part of the profit yielding structure and that legal expenses incurred in protecting the right are capital in nature (see ATO Interpretive Decision 2004/367). | Application to your circumstances | You incurred the legal expenses to preserve your right to practise your profession. The Commissioner considers that the legal expenses you incurred were to protect the profit making structure of your activity and are therefore capital in nature and not deductible under section 8-1 of the ITAA 1997.