1051613194472 | Legal database

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This edited version has been archived due to the length of time since original publication.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 private advice

Authorisation Number: 1051613194472

Date of advice: 9 December 2019

Ruling

Subject: Deductibility of legal expenses

Question 1

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)?

Answer

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".

Question 2

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?

Answer

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.

Question 3

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?

Answer

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.

Question 4

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?

Answer

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.

This ruling applies for the following periods:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

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

Copyright notice

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).