Private ruling: Legal expenses
Published: May 2012
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 February 2012

Ruling: Q1: Are you entitled to a deduction for the legal expenses incurred to challenge the decision to not grant you a fellowship? | A1: No.

Relevant facts and circumstances: You applied for a future fellowship to fund your research. Your application was unsuccessful. You have filed an application to challenge the decision. You have incurred legal expenses in challenging the decision.

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

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act (ITAA 1997) allows a deduction for expenses incurred in earning assessable income unless those expenses are capital or capital in nature. Paragraph 13 of TR 93/7 states the following: 13. The critical factor in determining the essential character of an outgoing is the character of the advantage sought by the making of the expenditure ( Sun Newspapers Ltd. v. FC of T (1938) 61 CLR 337 at 363 per Dixon J). Whether an outgoing is capital or revenue in nature "depends on what the expenditure is calculated to effect from a practical and business point of view" ( Hallstroms Pty. Ltd. v. FC of T (1946) 72 CLR 634 at 648 per Dixon J). Therefore, in determining whether a deduction for legal expenses is allowed 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 capital nature, then the expenses incurred in gaining the advantage will also be of a capital nature. The courts, on a number of occasions, have determined legal expenses to be an allowable deduction if the expenses arise out of the day to day activities of the taxpayer's business ( Magna Alloys & Research Pty Ltd v. Federal Commissioner of Taxation 80 ATC 4542; (1980) 11 ATR 276). The action out of which the legal expenses arise has to have more than a peripheral connection to the taxpayer's income earning activities. However if the expenses were incurred in protecting the underlying profit yielding structure they are considered to be capital in nature and will not be deductible. In your case, the legal expenses you incur do not arise as a result of your performance in your day to day activities, or in the course of maintaining the fellowship. Rather, they are incurred to enable you to obtain the fellowship which will create a profit-yielding structure. Legal expenses incurred in defending the profit-yielding subject are capital in nature. You are therefore not entitled to a deduction for the legal expenses incurred.

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