Private ruling: Legal expenses
Published: November 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a deduction for legal expenses? | A1: No.


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 allows a person to claim a loss or outgoing that is incurred in gaining or producing assessable income so long as the loss or outgoing is not of a capital, private or domestic nature. Where legal expenses arise as a consequence of the day to day activities of a business, that is, they are incurred in gaining or producing assessable income, the object of the expenditure is devoted towards a revenue end and the legal expenses are deductible ( Herald & Weekly Times v Federal Commissioner of Taxation (1932) 48 CLR 113; 2 ATD 169). However, where the expenditure is devoted towards a structural rather than an operational purpose, that is, they relate to the profit yielding structure, the expenditure is of a capital nature and the expenses are not deductible ( Sun Newspapers Ltd v FC of T (1938) 61 CLR 337; ATD 87; (1938) 1 AITR 403). Your legal expenses were incurred in determining the structure of the trust and the ownership of funds held rather than the operation of the trust. As such, your legal expenses are deemed to be capital in nature. Since the legal expenses are of a capital nature they are not deductible.

Relevant facts: On the trust balance sheet there is an unsecured loan which was in the name of an asset trust. | The third equity partner in a company and a unit trust claimed that the unsecured loan was theirs and sent a demand letter for repayment. | You sought legal advice to determine whether the partner was entitled to the amount of the unsecured loan. | You also sought to identify the legal entities involved in the unit trust.