Tax treatment of Legal fees incurred for review of director guarantees for bank loan

Hi PC Forum,

We (my partner & I) are directors and owners of a Private Company that financed a block of land (to be used as a future investment property) through a Bank.

The Bank required that we act as guarantors for the Company applying for the loan and required us to sign the related legal documents.
We incurred legal fees of $440 to have our Lawyer review the Guarantee documents prepared by the bank. A certificate of advice was also required by the bank from our Lawyer.

The $440 legal fee was invoiced by our Lawyer to us as individuals and we are due to pay the fees next week.

My question is, as Directors for the Company could claim the legal fees (or add to the land cost base) in the Company if we reimburse ourselves using company funds? Would we be better off having the Lawyer re-address the invoice to the Company and pay directly from the Company? Should we just leave as is and not worry about claiming? Any other suggestions?

Thanks in Advance
Cheers,

 

The lawyer would be unable to invoice the company as it was not advised, it was the guarantors as individuals that took the advice.

The fee doesn't relate to the income of the individuals so it might not be deductible. However, the company would have an argument that it was a borrowing cost in relation to the loan if it reimbursed you.

 

Thanks Terry, I was thinking the same regarding the borrowing cost for the loan from the company perspective. The bank wouldn't have issued the loan without the director guarantees.
Much appreciated.

 

The directors gave the guarantee? The advice may be regarding their role as a director. Maybe a borrowing cost. However it may be a private non deductible cost. The comment about the land cost suggests non deductible..land deductions may not yet be able go be deducted

 

I have rethought this and want to say I don't think it would be deductible at all. A guarantee doesn't directly relate to borrowing itself so it couldn't be a borrowing cost.

I think you might need a private ruling

 

If not for the guarantee, the loan would not be offered. How can that not be directly related to the loan?

 

ATO ID 2003/113

This decision has been withdrawn but addresses the capital cost v revenue nature of some borrowing expenses. The guarantee legal fees may well reflect as non-deductible rather than a borrowing costs deductible over 5 years (or the loan term) as the nature of the guarantee may not be a revenue impact but a cost to establish a loan facility and security that may be drawn, may be modified or not even used.
That likely means the legal cost is capital in nature and not deductible and a private ruling may be desired.

The key issue too is that of acquiring land. After 1 July 2019 deductions for development costs may not be given under the Steele's principles due to this all-but implemented law change :

https://parlinfo.aph.gov.au/parlInf...lay.w3p;query=Id:"legislation/billhome/r6369"

While a borrowing cost may be allowed as a potential deduction this proposed law change may stop the deduction being claimed

 

It is someone else's loan. Not related to the generation of income of the guarantor - even if sole director and/or shareholder.

I am not even sure it would be a capital cost - would it be the individual? They won't have a capital gain. the company is not incurring the expense so it wouldnt' be a capital cost of the company.

There must be some existing private rulings on this question

 

A Director may have a right of indemnity and provided the company incurs the cost it may be a relevant factor.Lets use the example of Qantas. Alan Joyce is required to sign a Boeing contract. He does so in his capacity as Director and so would one other Director and this is an act of the company according to Corporations Act s127. The giving of the guarantee is done so in the persons capacity as a Director and is an act of the company not the individual. If he seeks legal advice I would imagine the company would incur that cost and should. A company cannot ever sign or act, only a Director may act for the company. This legal separation of person from entity always exists. For the ATO to attack a deduction on this basis would be a major defect in tax administration. Imagine the impact on trusts if the act of a trustee were not a act of the taxpayer.

In the OP issue I believe that the entity must incur the cost and reimbursement is one way to effect that. And potentially claim the GST if applicable.

However for the operation of the new laws which will terminate deductions for expenses for new developments this makes the expense capital in nature rather than a deductible outgoing. However, a corporate tax entity is excluded for this provision and so the deduction may be available over 60months.

I would consider for a company that the ATO test described in ruling etc is :
- costs (including solicitors' fees) for preparing and filing mortgage documents

Advice on a guarantee and the advice to complete this mortgage process is likely a element of a borrowing expense.

However a private ruling request may be prudent as I would agree the absence of apparent rulings on this give uncertainty