Private ruling: Deductions
Date of advice: 3 March 2026
Published: 4 May 2026
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are the legal/litigation fees attributable to the facilitation of the liquidation of the Trustdeductible for managing tax affairs on the basis that tax affairs must be up to date, under section 25-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Are the fees incurred for retrieving documentation for the Trust's outstanding tax affairs from the liquidator deductible for managing tax affairs, under section 25-5 of the ITAA 1997? | A2: Yes, but only to the extent the documentation relates to the management of tax affairs. To the extent expenses relate to other matters or for other purposes they are not deductible under section 25-5 of the ITAA 1997. | Q3: Are the fees incurred for retrieving documentation for the calculation of the Trust's capital gain from the sale of abusiness asset deductible, given the Trust's business operations is renting out accommodation, section 8-1 of the ITAA 1997? | A3: No.

Relevant facts and circumstances: The Trust is being acted upon by a specified individual as liquidator as trustee. The Trust has multiple outstanding income tax returns. Beneficiaries of the Trust do not possess significant capacity to act as trustee. The liquidator has charged the Trust significant legal fees to obtain documentation to facilitate the liquidation of the Trust and associated entity. The Trust and related entity are required to be up to date with tax lodgments to finalise the liquidation process. Legal Fees incurred include (but are not exhaustive): • Correspondences between specified parties. • Drafting and finalising affidavit to liquidator. • Following court costs associated with affidavit and amendments as required. • Obtaining documentation for settlement of property. • Costs facilitating the sale of the property. The information retrieved relates to third party source documents to prepare the Financial Accounts and Tax Return, which include (but are not limited to): • Bank Statements • Title Searches • Stamp Duty Assessments • Purchase and Sale Contracts of the properties • Liaison with Real Estate Agents Noting the legal fees amounts are quite exhaustive, the liquidator utilized a large amount of their resources to retrieve information regarding the Trust but without producing a tangible piece of information or result. One of the beneficiaries passed away on a specified date, while the remaining beneficiary is under a legal disability. As a result, attempts to retrieve third party source documents by the liquidator was extremely protracted. The documentation retrieved included the sale documentation and relevant cost base adjustments. The business asset was a property with the intention of renting it out. However, the last known year the property derived income was in a specified year. You believe that legal fees incurred to facilitate the sale of property held within the Trust is deductible under section 8-1 of the ITAA 1997 as original intention for property held was to rent it out. Various supporting documentation was provided including invoices for various legal services and fees relating to the sale of a specified property.

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 | Income Tax Act 1986

Reasons for decision: Summary: The fees incurred for facilitating the liquidation of the Trust are not related to the management of the tax affairs and therefor are not deductible under section 25-5 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 25-5 of the ITAA 1997 allows deductions for expenses to the extent they are for managing your tax affairs or complying with an obligation imposed on you by a Commonwealth law, insofar as that obligation relates to your tax affairs. Section 995-1 of the ITAA 1997 defines tax affairs as meaning affairs relating to tax. Further in section 995-1 tax is defined as income tax imposed by the Income Tax Act 1986 (ITA 1986), as assessed under this Act, or imposed as such by any other Act, as assessed under this Act. Expenditure related to the liquidation of an entity does not relate to income tax imposed by the ITA 1986, or any other act, and assessed under the ITAA 1997 or the Income Tax Assessment Act 1936 . The liquidation of the Trust is not an affair relating to tax under the meaning of section 995-1. As such the fees incurred in facilitating the liquidation of the Trust are not deductible under section 25-5 of the ITAA 1997. | Summary: To the extent expenses are incurred in managing your tax affairs the expenses will be deductible under section 25-5 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: As above section 25-5 of the ITAA 1997 allows deductions for expenses to the extent they are for managing your tax affairs or complying with an obligation imposed on you by a Commonwealth law, insofar as that obligation relates to your tax affairs. Where expenses were incurred for other reasons or purposes it will not be decutible under section 25-5 of the ITAA 1997. For example the preparation of retrieval of documentation for the purposes of court action, creditors or liquidation will not relate to the management of your tax affairs and would not be decutible under section 25-5 of the ITAA 1997. Where the documentation relaes to the act of selling the property it will not be decutible under section 25-5 of the ITAA 1997. Generally title searches and stamp duty assessments conducted in the course of selling a property will be capital in nature and will be referrable to the sale of a CGT assset and not management of one's tax affairs. Similarly, liasing with real estate agents in the course of selling a property would generally not be dedcutible under section 25-5 of the ITAA 1997. To the extent documentation is for the preparation of your outstanding income tax returns it will be deductible under section 25-5 of the ITAA 1997. To the extent expenses relate to other matters or for other purposes they are not deductible under section 25-5 of the ITAA 1997. It is also necessary to separate charges referrable to the related entity. | Summary: The Trust has not reported any income for a significant period of time and is not considered to be carrying on any business activities. As such any expenses are not deductible under section 8-1 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 8-1 of the ITAA 1997 allows a deduction for expenses incurred in gaining or producing your assessable income or necessarily incurred in carrying on a business. The deductions are limited to the extent the expenses are private or capital in nature. You have stated the last time the Trust reported income from the property was in a specified income year. There is no evidence of the Trust reporting any income, nor conducting any activities, for a significant period of time. The documentation you provided noted the property was the residential address for specified related individuals for a number of years. It does not state which years the property was the residential address, however, given the interests in other property were disposed of by a specified date it could be inferred the property was the residential address since at least that time. Additionally, you stated the last time income was reported from the property was in a specfied income year so it may well have been the residential address from at least then, if not earlier. Simply holding the residential address of related individuals would not consitute the carrying of a business. Additionally the passive rent of properties is not considered to be carrying on a business. However, to determine whether the rental activites were more than passive, and thus a business was carried on, requires analysis of a broad range of indicators. To carry on a business also requires more than a mere intention to do so. There is not enough information provided to make a determination as to whether a business was previously carried on. Also it is not necessary to do so. This is because the Trust has not reported any income for a significant period of time, nor is there any evidence of any other business activities being carried on. The Trust itself is dormant. The trustee of the Trust, was in fact deregistered in a specifed earlier year. Given there is no income currently being reported it is considered the Trust is not carrying on a business. For an expense to be deductible under section 8-1 of the ITAA 1997 it either needs to be produced in gaining or producing your assessable income or necessarily incurred in carrying on a business. The Trust is not considered to be carrying on a business. Even if it had in previous times carried on a business, it has not done so for a significant period. Additionally, the Trust has not reported any income so it is hard to see how the expenses could have been incurred in gaining or producing your assessable income. Further to this, the documentation provided is for commission and administration fees relating to a property sale/settlement. This is also supported by your statement that some of the legal expenses were for • Obtaining documentation for settlement of property • Costs facilitating the sale of the property. These fees are capital in nature and thus denied under section 8-1 of the ITAA 1997. As such the expenses are not deductible under section 8-1 of the ITAA 1997.

Does IVA apply to this private ruling?: Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement. | If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website ato.gov.au/gaar.