The AAT has found that legal expenses incurred by a taxpayer in challenging an ASIC banning order prohibiting him from providing financial services for 5 years and in defending criminal charges for alleged insider trading, were not incurred by him “in the course” of gaining or producing assessable income and therefore were not deductible under s 8-1(1)(a) of the ITAA 1997 for the 2011 income year.
In the 2011 income year, the taxpayer incurred the legal expenses challenging the ASIC banning order (which became effective on 7 May 2010 following review by the AAT) in proceedings before the Federal Court and Full Federal Court (the taxpayer’s appeals were dismissed by both courts), and in defending 20 criminal charges for alleged insider trading (the taxpayer was acquitted on 17 of the charges with the remaining 3 withdrawn by ASIC).
The Tribunal noted the taxpayer had in April 2007 entered into an Authorised Representative Agreement (ARA) with a company (a holder of an Australian Financial Services Licence) to provide stock broking services as an Authorised Representative (AR) on behalf of the company in accordance with the ARA.
Before turning to consider the deductibility of the legal expenses, the AAT made findings concerning essentially whether the taxpayer was “employed” by the company and whether the taxpayer’s appointment as an AR of the company was merely “suspended” or “terminated”. Based on the evidence before it, the AAT found the taxpayer was not an employee of the company. It also found the taxpayer’s position as an AR of the company was “terminated” on 7 May 2010, when he was unable to obtain a stay of the ASIC banning order.
The Tribunal held there was an insufficient “connection” (“link” or “nexus”) between the legal expenses and the production of assessable income by the taxpayer (noting the taxpayer had ceased to occupy the position of an AR at the company when the expenses were incurred).
Furthermore, the AAT held the Federal Court legal expenses were non-deductible capital expenditure under s 8-1(2)(a). It also held the legal expenses to defend the criminal charges were non-deductible private expenditure per s 8-1(2)(b).
In addition, the AAT held that a private ruling relating to the 2009 and 2010 income years (which had allowed deductibility for legal expenses incurred in reviewing the ASIC banning order, but not for expenses to have the taxpayer’s name withheld in proceedings) was not binding on the Commissioner in relation to the 2011 income year.
(AAT Case [2013] AATA 783, AAT, Ref No: 2012/3748, Walsh SM, 4 November 2013.)
[LTN 215, 6/11/13]