Private ruling: Managing tax affairs
Published: June 2012
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for legal fees in relation to tax advice? | A1: No.

Relevant facts and circumstances: Your relative passed away. The majority of the value of assets controlled by your relative was attributable to a holding of shares in a listed entity. The shares were held through entities which your relative controlled. The listed shares were held by Company A. At the time of your relative's death, Company A had a number of ordinary class shares on issue. Half of those ordinary shares were held by Trustee Company B as trustee for Trust 1. The remainder of the shares were held by Trustee Company C as trustee for Trust 2. Your relative held all the shares in Trustee Company B and the shares were specifically gifted to their de facto in their will. The de facto was also one of two directors in Trustee Company B. All of the shares in Trustee Company C were held by the de facto. The de facto was one of two directors in Trustee Company C. Therefore at the time of your relative's death, you had no control over, or interest in Trustee Company B and Trustee Company C, or Company A. You engaged lawyers to act on your behalf in respect of a dispute in relation to the division of your relative's estate and the assets controlled by your relative. On settlement of the dispute it was agreed that you would be given control over Trustee Company B and that Company A would be wound up and a liquidator's distribution of the listed shares would be made to each trust in the proportions of the respective shareholdings. Trust 1 then distributed the shares to you. During the dispute, you instructed your lawyers to open a separate file to record the time spent on tax issues. You received a wide range of advice in relation to the tax treatment of possible alternatives for settling the dispute. Once the dispute had been resolved, you received advice regarding the tax treatment of each of the steps under the settlement arrangement ultimately with a view to what the tax consequences would be of the liquidation of Company A and the division of assets between the two trusts. You also received advice in relation to the capital gains tax consequences of receiving the listed shares from Trust 1 into your personal name. You paid for the legal fees out of your own funds.

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

Reasons for decision: Summary: Subsection 25-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for tax related expenses. Under this section, you can deduct expenditure you incur to the extent that it is for: · managing your tax affairs, or · complying with an obligation imposed on you by a Commonwealth law in so far 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 in this section as meaning income tax as assessed under the income tax assessment acts. Taxation Determination TD 94/91 contains the Commissioner's view in relation to who is allowed a deduction under subsection 69(1) of the Income Tax Assessment Act 1936 for expenditure in respect of a tax related matter of a trust (subsection 69(1) has been replaced by section 25-5 of the ITAA 1997). | Detailed Reasoning - Paragraphs 4 and 5 of TD 94/91 state:: If a beneficiary of a trust or a director of a company which is a trustee of a trust incurs expenditure on the management or administration of the income tax affairs of the trust, he or she is not allowed a deduction for this expenditure in his or her own income tax return. This is because the expenditure is in respect of a tax related matter of the trustee of the trust and is only an allowable deduction in the tax return of the trust. However any taxpayer, who incurs expenditure in respect of compliance with an obligation imposed by a Commonwealth law insofar as the obligation relates to the income tax affairs of a trust, is allowed a deduction for this expenditure. Even though such expenditure is related to the tax affairs of the trust the taxpayer who incurs this expenditure under that obligation is the 'taxpayer' for the purposes of subsection 69(1) and is allowed a deduction, in his or her tax return. | Detailed Reasoning - Paragraph 2 of TD 94/91 states:: A 'taxpayer' as defined in subsection 6(1), means a person deriving income or deriving profits or gains of a capital nature. For a trust estate, it is the trustee who conducts the affairs of the trust and in whose name the income is derived and expenses are incurred. It is the trustee of the trust therefore who is a 'taxpayer' for the purposes of subsection 69(1) in relation to the trust. In your case, you have incurred expenses in relation to the tax treatment of possible alternatives for settling the dispute. Once the dispute had been resolved, you received advice regarding the tax treatment of each of the steps under the settlement arrangement ultimately with a view to what the tax consequences would be of the liquidation of Company A and the division of assets between Trust 1 and Trust 2. You also received advice in relation to the capital gains tax consequences of receiving the listed shares from Trust 1 into your personal name. The legal fees are incurred in relation to the tax affairs of Company A and Trustee Company B as trustee for Trust 1. As a beneficiary of the trust, you are not entitled to a deduction for legal fees incurred in managing the tax affairs of the trust or the company. As a possible trustee of the trust, there has been no obligation imposed on you by a Commonwealth law that you had to comply with. Therefore, as the expense is not in relation to managing your own tax affairs or in complying with an obligation imposed on you by a Commonwealth law, you are not entitled to a deduction under section 25-5 of the ITAA 1997.

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