Private ruling: Legal expenses deduction
Date of advice: 20 July 2016
Published: August 2016
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a deduction for the legal expenses incurred in pursuing delayed payments for using your asset? | A1: Yes

Relevant facts and circumstances: You have an asset. You leased your asset. You received payments for using your asset and you included in your tax return as assessable income. The lease payments fell behind, you took legal action to pursue the delayed payments. The legal action took many years to finish; you incurred legal expenses to pursue the delayed payments. You received several tax invoices from your solicitor and you made payment for each tax invoice. You received a lump sum payment as the result of the legal action.

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

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 determining whether a deduction for legal expenses is allowed under section 8-1 of the ITAA 1997, the nature of the expenses must be considered ( Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 3 AITR 436; (1946) 8 ATD 190). The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses. If the advantage to be gained is of a revenue nature, then the expenses incurred in gaining the advantage will also be of a revenue nature. In the same way, if the advantage to be gained is of a capital nature then the expenses incurred in gaining the advantage will also be of a capital nature. It follows also that the character of legal expenses is not determined by the success or failure of the legal action. In your case, the legal expenses incurred in order to pursue the delayed payments for using your asset are outgoings with nexus to assessable income, where the character of the advantage sought is on revenue account. The legal expenses are therefore deductible under section 8-1 of the ITAA 1997. | Detailed Reasoning - Additional information for your consideration: Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions sets out the Commissioner's views on the meaning of incurred. Generally, a taxpayer incurs an expense at the time they owe a present money debt that they cannot escape. The guidelines developed by the courts that help to determine if an expense has been incurred include: • there must be a presently existing liability to pay a pecuniary sum, • presently existing liability is determined on the circumstances of the case, • an expense is incurred when actually paid if there was no presently existing liability. In your case, the legal action took many years to finish, you received several tax invoices from your solicitor and you paid these tax invoices in different financial years. Therefore, you have to claim legal expenses deduction in the relevant financial years.