Private ruling: Deduction – legal expenses – director penalty notice – garnishee notice
Date of advice: 20 November 2018
Published: March 2019
Ruling period: Year ended 30 June 2017
Date scheme commenced: 30 June 2016

Ruling: Q1: Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the legal expenses incurred in relation to disputing the Director Penalty Notice (DPN) and garnishee notices? | A1: No. | Q2: Are you entitled to a deduction under subsection 25-5(1) of the ITAA 1997 for the legal expenses incurred in relation to disputing the DPN and garnishee notices? | A2: No.

Relevant facts and circumstances: Between DD/MM/YYYY and DD/MM/YYY you were a director of a company. You received a DPN in relation to unpaid superannuation guarantee on DD/MM/YYYY. You lodged your resignation as a Director of the company with ASIC on DD/MM/YYYY, requesting the resignation be backdated to DD/MM/YYYY. You received a garnishee notice on DD/MM/YYYY. You engaged a lawyer and incurred legal expenses disputing the DPN and the garnishee notice. You were not paid a director fee during the period you were a director of the company.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 25-5 | Income Tax Assessment Act 1997 Section 995-1

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (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 your case, you did not earn assessable income in your capacity as a Director of the company. As such the legal expenses you incurred in relation to the DPN and garnishee notices were not incurred in gaining or producing assessable income. Therefore, the legal costs incurred are not deductible under section 8-1 of the ITAA 1997. Subsection 25-5(1) of the ITAA 1997 states that: You can deduct expenditure you incur to the extent that it is for: (a) managing your tax affairs; or (b) complying with an obligation imposed on you by a Commonwealth law insofar as that obligation relates to the tax affairs of an entity ‘Tax affairs’ is defined in section 995-1 of the ITAA 1997 as affairs relating to tax. ‘Tax’ is defined to mean income tax assessed under either the ITAA 1997 or the Income Tax Assessment Act 1936 and imposed by any other Act. In your case, the director penalty imposed under Division 269 of the Taxation Administration Act 1953 is not an ‘income tax’. Also, the superannuation guarantee, which led to the imposition of the director penalty and in turn the garnishee notice, is not an ‘income tax’. As these amounts are not ‘income tax’, the expenditure you incurred with regards to the DPN was not in relation to your ‘tax affairs’ as defined for the purposes of section 25-5 of the ITAA 1997. Therefore, you are also not entitled to a deduction under subsection 25-5(1) of the ITAA 1997.