Private ruling: Business expenses
Published: November 2012
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to a deduction for legal expenses incurred by the company but paid by you? | A1: No.

Relevant facts and circumstances: You were a director of a company. The company was involved in legal proceedings and was obliged to defend itself so as to protect its assets and its ongoing business operations. You paid for legal fees and disbursements as the company did not have sufficient funds to meet its obligation thus requiring you, as director, to meet the payment of the debt due.

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 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. The Courts and Tribunals have consistently held that a deduction is not allowable for company expenses paid by directors as they have not been incurred in gaining or producing assessable income in the taxpayer's capacity as a director. The expenses were not incurred by the taxpayer in earning his assessable income but rather the income of the company (FC of T v Munro (1926) 38 CLR 153). In Case U134 87 ATC 780, expenses incurred on behalf of a family company by a director of the company were not deductible. The expenses had not been incurred in gaining or producing his assessable income in his capacity as a director and there was not a sufficient connection between the expenses and dividend income he received as a shareholder, nor was there a sufficient connection between the expenses and his business of a shareholder holding shares in the family company. In Case L86 (1961) 11 TBRD, the taxpayer, a public accountant, paid during the year of income amounts to a company, which he had formed and of which he was the managing director, for the purpose of enabling it to pay its debts. The taxpayer claimed that it was necessary for him to keep faith with his many business associates, who had assisted the company with credit, because of his reputation and that if he had not contributed money to the company to pay its creditors his reputation would have suffered and it would not have been practicable for him to continue in the practice of his profession. It was held that the deduction was not allowable. In your case, you paid company legal expenses using your personal funds. These expenses were paid on behalf of the company and are not referable to your income producing activities. Therefore you are not entitled to a deduction for the company's legal expenses that were paid by you.