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TAX TREAMENT OF LEGAL AND PROFESSIONAL EXPENSES

With effective from year of assessment 2006, legal and professional expenses are define by the Income Tax Act (ITA) and public ruling as follows:

Legal and professional expenses are deductible where these are incurred in the maintenance of trade rights or trade facilities, existing or alleged to exist and are not deductible, as being the a capital nature, wher incurred for the purpose of acquiring new rights or facilities. The deductibility of expenses incurred to maintain alleged trade rights does not depend whether the action is successful or not.

Therefore, expenses which are not wholly and exclusively incurred in the production of gross income or prohibited from deduction under subsection 39(1) of the ITA are not deductibility. Therfore, below is a summary of expenses deductible and non-deductible.

Deductibible legal and professional expenses are as follows:

  • debt collection incurred by a person in the course of collecting trade debts from customers
  • renewal of loans incurred by a finance company on existing loans
  • preparation of accounts
  • statutory audit fee
  • defending title to property
  • renewal of lease by a landlord
  • defending an action connected with trade or breach of trading contracts
  • disputes over trading contracts
  • for obtaining end-financing facility for the benefit of house purchasers, valuation of land, transfer of titles, sub0division and conversion of land, and survey fees incurred by a developer or a dealer in property
  • renewal of leases and licences
  • claim for compensation for trading goods destroyed, defective or lost in transit
  • employment agreement and trading contracts or agreement

Non-deductible legal and professional expenses are as follows

  • debt collection incurred by a person of non-trade debts and loans of a capital nature
  • renewal of loan incurred by a trading company
  • renewal of a mortgage on premises
  • cost of raising additional capital
  • secretarial fees, annual corporate filing and meeting expenses
  • tax agent fee for filing of tax returns and  computation, and appeals.
  • property is let for the first time by a landlord
  • cost of defending criminal prosecution or in connection with unlawful acts in the operation of a business
  • variation of vehicle licences from ordinary lorries to articulated vehicles
  • formation, renewal, variation or dissolution of a partnership
  • transfer of mortgage on business premises
  • grants of a lease of business premises
  • acquisition of capital assets or the sale or transfer of capital assets
  • securing an enduring advantage for a trade or business
  • obtaining a trading licence
  • increasing or reducing share capital or alteration of Memorandum and Articles of Association of a company
  • floatation, registration, winding-up or liquidation of a company
  • obtaining new leases, mortgages, loans or credit facilities
  • valuation charges relating to probate, company reconstruction and change of ownership
  • claim for unlawful or unjust dismissal by an employee
  • For obtaining bank overdraf, term loan and brdiging facility and revaluation of land incurred by a property developer

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