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Tax Telegraph, June 2013

CasesAccounting and legal expenses incurred in annulling bankruptcy not deductible

Healy and Commissioner of Taxation [2013] AATA 281

The Administrative Appeals Tribunal (AAT) has held that accounting and legal expenses of over $100,000 which were incurred in connection with the taxpayer, a former company director, obtaining an annulment of his bankruptcy, were not deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). The AAT found that the expenses were not ‘incurred’ by the taxpayer, but were incurred by his brother and the taxpayer had no legal obligation to repay him.

Further, the AAT held that a deduction would not have been allowable under section 8-1 of the ITAA 1997 because there was no link or nexus between the expenses and his income-earning activities as a company director, as the expense was incurred in seeking an annulment of his bankruptcy and therefore not related to his income-earning activities. The AAT also considered that the expenses would have been non-deductible on the basis that they were of a capital or private nature.

The AAT also found that the expenses would not have satisfied the requirements for deductibility under section 25-5 of the ITAA 1997 (tax-related expenses incurred in managing tax affairs).

Distribution of capital gain by trust held to be ‘special income’ derived by superannuation fun

SCCASP Holdings Pty Ltd as trustee for the H&R Super Fund v Commissioner of Taxation [2013] FCAFC 45

 The Full Federal Court has dismissed the taxpayer’s appeal against the decision of the Federal Court in SCCASP Holdings as trustee for the H&R Super Fund v Commissioner of Taxation [2012] FCA 1052 and held that a resolution to distribute a capital gain from a trust was ‘special income’ derived by a self-managed superannuation fund (SMSF) under former section 273(6) of the Income Tax Assessment Act 1936 (ITAA 1936) even though the amount was actually not received by the SMSF or applied or dealt with in any way on its behalf.

The Court considered that section 273(6) of the ITAA 1936 seeks to classify as special income, income derived from a particular source, i.e. the purpose of the word ‘derived’ in section 273(6) is to identify the source, not the receipt. Therefore, the relevant SMSF will be deriving income in its capacity as a beneficiary of a trust estate for the purposes of section 273(6) of the ITAA 1936 if it becomes entitled to the income in its capacity as a trustee for the beneficiary. Whether the SMSF actually receives the money is a matter between the beneficiary and the trustee of the trust, and is not a determining factor in terms of whether the income is ‘derived’ for the purposes of section 273(6) of the ITAA 1936.

The Full Court concluded that this construction was consistent with the Full Federal Court decision in Allen v Federal Commissioner of Taxation [2011] FCAFC 118 and the taxpayer’s appeal was dismissed.

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