ATO Interpretative Decision

ATO ID 2001/27

Income Tax

Deductions and expenses: Legal expenses in course of employment
FOI status: may be released
  • This document has changed over time. View its history.

Status of this decision: Decision Current
CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Are legal expenses incurred by an employee in the course of employment an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. Legal expenses incurred by an employee in the course of employment are an allowable deduction under section 8-1 of the ITAA 1997.

Facts

The taxpayer, as part of their employment duties, was instructed to write a paper. Subsequently, the taxpayer was reprimanded for comments included in the paper. The taxpayer, being concerned about the possibility of being dismissed from the position as a result of the comments, sought legal advice.

Reasons for Decision

Section 8-1 of the ITAA 1997 provides that a loss or an outgoing is an allowable deduction if it is incurred in producing assessable income or in carrying on a business for the production of assessable income unless that loss or outgoing is capital or of a private or domestic nature.

Legal expenses are generally deductible if they arise out of the day to day activities of the taxpayer's business (Herald and Weekly Times Ltd v. Federal Commissioner of Taxation (1932) 48 CLR 113; (1932) 39 ALR 46; (1932) 2 ATD 169) and the legal action has more than a peripheral connection to the taxpayer's income producing activities ( Magna Alloys and Research Pty Ltd v. FC of T (1980) 49 FLR 183; (1980) 11 ATR 276; 80 ATC 4542).

Similarly, in FC of T v. Day [2008] HCA 53 and FC of T v. Rowe (1995) 31 ATR 392; 95 ATC 4691, the courts accepted that legal expenses incurred in defending the manner in which a taxpayer performed his employment duties were allowable. No significance was placed by the court on the taxpayer's status as an employee.

The taxpayer has incurred legal expenses in defending themself against criticism of the taxpayer's work practices. The evidence indicates that, in carrying out the actions that led to the criticism, the taxpayer was doing no more than executing their employment duties. Consequently, the legal expenses incurred are an allowable deduction.

Amendment History

Date of amendment Part Comment
4 April 2014 Issue Minor wording inclusion of ITAA 1997
Facts Minor wording
Reasons for Decision Minor wording inclusion of ITAA 1997
Insert cases:

C of T v Day [2008] HCA 53
Herald and Weekly Times Ltd v. Federal Commissioner of Taxation (1932) 48 CLR 113; (1932) 39 ALR 46; (1932) 2 ATD 169
Magna Alloys and Research Pty Ltd v. FC of T (1980) 49 FLR 183; (1980) 11 ATR 276; 80 ATC 4542

Date of decision:  6 October 1997

Legislative References:
Income Tax Assessment Act 1997
   section 8-1

Case References:
FC of T v Rowe
   (1995) 31 ATR 392
   95 ATC 4691

FC of T v Day
   [2008] HCA 53

Herald and Weekly Times Ltd v. Federal Commissioner of Taxation
   (1932) 48 CLR 113
   (1932) 39 ALR 46
   (1932) 2 ATD 169

Magna Alloys and Research Pty Ltd v. FC of T
   (1980) 11 ATR 276
   80 ATC 4542

Keywords
Legal expenses

Siebel/TDMS Reference Number:  UMG22770

Business Line:  Small Business/Individual Taxpayers

Date of publication:  4 June 2001

ISSN: 1445-2782

history
  Date: Version:
  6 October 1997 Original statement
You are here 4 April 2014 Updated statement