Issue
Are fees paid by the taxpayer to their legal advisor to review a sublease and a licence agreement before entering into them deductible under paragraph 40-880(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The legal fees paid by the taxpayer to their legal advisor to review a sublease and licence agreement before entering into them are not deductible under paragraph 40-880(1)(a) of the ITAA 1997 because the fees were not incurred to establish the taxpayer's business structure.
Facts
The taxpayer proposed to open a 'branded' retail business in subleased premises. The taxpayer paid their legal advisor to review a sublease agreement for the premises and a licence agreement for the use of intellectual property in the business. The review was carried out before the taxpayer entered into the agreements and before the retail business commenced to operate.
Reasons for decision
Subject to certain requirements and exclusions, section 40-880 of the ITAA 1997 provides a deduction for certain types of business related capital expenditure incurred after 30 June 2001.
One of these types of expenditure is described in paragraph 40-880(1)(a) of the ITAA 1997 as expenditure to establish your business structure. The term 'business structure' refers to the legal entity (such as a company) or the legal relationship (such as a partnership or trust) that is established as the entity that will carry on the business for a taxable purpose and that will hold the business assets. Neither the sublease agreement nor the licence agreement amounts to a business structure for the purpose of paragraph 40-880(1)(a).
In addition, subsection 40-880(3) of the ITAA 1997 prevents a deduction under section 40-880 to the extent the expenditure is in relation to a lease or other legal or equitable right. The sublease and the licence are leases and rights and the legal expenses to review them were incurred in relation to those agreements.
It follows that the legal fees paid by the taxpayer to review the sublease and licence agreements are not deductible under section 40-880 of the ITAA 1997 because they were not incurred in establishing the business structure and are, in any event, specifically excluded from being deductible.