Private ruling: Legal expenses
Published: July 2014
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Are the legal fees incurred to draw up a financial binding agreement with your spouse deductible under Section 8-1 of the Income Tax Assessment Act 1997 ? | A1: No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You have a spouse. You and your spouse want to keep sole ownership of certain personal assets including assets that were acquired before the spousal relationship commenced, and inheritances and gifts received. Financial assets include company shares, rental properties, bank deposits, etc. You plan on having a binding financial agreement drawn up by a legal practitioner.

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) provides that a loss or an outgoing is an allowable deduction if it is incurred in producing assessable income unless that loss or outgoing is capital or of a private or domestic nature. For legal expenses to constitute an allowable deduction, it must be shown that they are incidental or relevant to the production of the taxpayer's assessable income or business operations. Also, in determining whether a deduction for legal expenses is allowable under section 8-1 of the ITAA 1997, the nature of the expenditure 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 private nature, then the expenses incurred in gaining the advantage will also be of a private nature. In this case, you and your spouse want to keep sole ownership of personal assets. Such agreements between spouses are considered inherently private in nature. The legal expenses are not incurred in earning your assessable income: the outgoing is private in nature. Therefore you are not entitled to a deduction for legal fees under Section 8-1 of the ITAA 1997.