Disclaimer
This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1051452475792

Date of advice: 20 November 2018

Ruling

Subject: Deduction – legal expenses – director penalty notice – garnishee notice

Question 1

Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the legal expenses incurred in relation to disputing the Director Penalty Notice (DPN) and garnishee notices?

Answer

No.

Question 2

Are you entitled to a deduction under subsection 25-5(1) of the ITAA 1997 for the legal expenses incurred in relation to disputing the DPN and garnishee notices?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2017

The scheme commenced on

30 June 2016

Relevant facts and circumstances

Between DD/MM/YYYY and DD/MM/YYY you were a director of a company.

You received a DPN in relation to unpaid superannuation guarantee on DD/MM/YYYY.

You lodged your resignation as a Director of the company with ASIC on DD/MM/YYYY, requesting the resignation be backdated to DD/MM/YYYY.

You received a garnishee notice on DD/MM/YYYY.

You engaged a lawyer and incurred legal expenses disputing the DPN and the garnishee notice.

You were not paid a director fee during the period you were a director of the company.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 25-5

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 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.

In your case, you did not earn assessable income in your capacity as a Director of the company. As such the legal expenses you incurred in relation to the DPN and garnishee notices were not incurred in gaining or producing assessable income. Therefore, the legal costs incurred are not deductible under section 8-1 of the ITAA 1997.

Subsection 25-5(1) of the ITAA 1997 states that:

‘Tax affairs’ is defined in section 995-1 of the ITAA 1997 as affairs relating to tax. ‘Tax’ is defined to mean income tax assessed under either the ITAA 1997 or the Income Tax Assessment Act 1936 and imposed by any other Act.

In your case, the director penalty imposed under Division 269 of the Taxation Administration Act 1953 is not an ‘income tax’. Also, the superannuation guarantee, which led to the imposition of the director penalty and in turn the garnishee notice, is not an ‘income tax’.

As these amounts are not ‘income tax’, the expenditure you incurred with regards to the DPN was not in relation to your ‘tax affairs’ as defined for the purposes of section 25-5 of the ITAA 1997. Therefore, you are also not entitled to a deduction under subsection 25-5(1) of the ITAA 1997.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).