Private ruling: Deductibility of legal expenses
Date of advice: 9 December 2019
Published: February 2020
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the legal costs incurred in relation to the Second Dispute form part of the cost base of the two assets owned by the Taxpayer under section 110-25(6) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. Having regard to the facts and circumstances, the Commissioner considers that the expenditure for legal services relating to the Second Dispute properly has been incurred to establish, preserve or defend your interest in the Assets. Information about capital costs of preserving or defending your title to a capital gains tax (CGT) asset can be found on ato.gov.au by searching for "QC52174". | Q2: Will the legal costs incurred by the Taxpayer be deductible under section 8-1 of the ITAA 1997 in relation to defending the allegation that the Company fails to pay dividends? | A2: Yes. Having regard to the facts and circumstances, the Commissioner considers that the taxpayer was remunerated for their duties as a Director and that the legal fees are incurred as a result of carrying out those duties. | Q3: Will the legal costs incurred by the Taxpayer in defending the claim of exclusion of another party from management of the Company form part of the cost base of the shares owned by the Taxpayer under section 110-25(5) of the ITAA 1997? | A3: Yes. Having regard to the facts and circumstances, the Commissioner considers that the legal expenses incurred to defend the exercise of their powers as majority shareholder were to preserve the value of the shares. | Q4: Will the legal costs incurred by the Taxpayer in making a cross-claim that another party holds the 25% of shares in the Company on trust for the Taxpayer form the cost base of the shares under section 110-25(6) of the ITAA 1997? | A4: Yes. Having regard to the facts and circumstances, the Commissioner considers that the expenditure for legal services relating to the ownership of shares on trust has been incurred to establish title to the shares.

Relevant facts and circumstances: Party A and Party B commenced legal proceedings against you and the Company. The heads of claim covered a number of matters, broadly translated into two categories, being the "First Disputes" and the "Second Disputes". The Company was incorporated. Prior to incorporation, the business activity was carried out by you as a sole trader. Upon incorporation, you held an amount of the shares in the Company and Party A held a different amount. From incorporation until now, you were a Director of the Company. Party A was also a Director of the Company from incorporation until a later date. You receive a total remuneration package that provides one amount to be paid to you in return for your employment and your exercise of duties as Director. The Company Disputes You have incurred expenditure on legal expenses relating to defending a claim. The basis of the claim is that you have allegedly improperly exercised your powers as Director in the relevant years. Party A and Party B have alleged in their statement of claim that Party A was improperly removed as a Director by you. Your defence details that you took action as a shareholder to remove the Party A as a Director of the Company. You and the Company have lodged a cross-claim alleging that the different amount of shares held by Party A are held on trust for your benefit and calls for legal title of these shares to be transferred to you. The Apartments Dispute The statement of claim makes further allegations that in relation to a property development that you, Party A and Party B were involved in as a Partnership with other parties. The allegation relates to the ownership interests of two assets and your conduct in relation to those ownership interests. You have incurred expenditure on legal fees in relation to defending these allegations.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 110-25