Are they deductible?
Scenario:
Our company is in negotiation for the sale of our business. The business is wholly owned by a holding company that is in turn owned by family trusts. We are paying fees to a legal firm to complete a due diligence process. The shares in the holding company will be sold to the potential buyer.
Are these fees tax deductible? If so, by which entity?
Explanation:
Since the legal fees are one-off in character and related to the long-term holding of the family trusts’ shares in the holding company, they are likely to be capital in nature and non-deductible(ITAA 1997 s 8-1 and Sun Newspapers Ltd & Anor v FC of T (1938) 61 CLR 337).
However, the legal fees can form part of the cost base of the shares held by the two family trusts for CGT purposes (ITAA 1997 s 110-25(3) and 110-35). They will, therefore, reduce the overall capital gain made by the trusts on the sale of their shares in the holding company.