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Edited version of private ruling
Authorisation Number: 1011470670084
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Ruling
Subject: Legal expenses
Question 1
Are you entitled to a deduction for legal fees?
Answer
Yes.
This ruling applies for the following period
30 June 2010
The scheme commenced on
1 July 2009
Relevant facts and circumstances
One of your employees completed a contract which did not meet safety regulations.
You were taken to court by the regulatory body.
You attended the Magistrates Court multiple times to defend your case.
You incurred legal costs defending the action.
Relevant legislative provisions
Section 8-1 of the Income Tax Assessment Act 1997 provides that a loss or an outgoing is an allowable deduction if it is incurred in producing 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 your 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 your income producing activities (Magna Alloys and Research Pty Ltd v. FC of T (1980) 49 FLR 183; (1980) 11 ATR 276; 80 ATC 4542).
Where an expense is incurred involuntarily, your motives in pursuing the action will be irrelevant to the determination of its deductibility. It is the objective circumstances which compel you to incur the expense which determine its deductibility (Shokker v. FC of T 99 ATC 4504; 42 ATR 257).
IT 149 states that, there is a type of case in which a taxpayer who is carrying on a business in good faith and in a reputable manner necessarily exposes himself to some risk of occasional prosecution because, in the day to day conduct of his business, he must operate through employees and there is always a risk that more or less inadvertently he may fall into a breach of the law.
In your situation, as a result of an employee not performing work to Energy Safe Victoria's safety regulations, legal action was initiated by the Plaintiff. The expenses you incurred in defending the action and your right to retain your license were involuntary. It is accepted you incurred the legal expenses for this purpose and having regard to the above decisions, it is also accepted the legal expenses were incurred in earning your assessable income.
Accordingly you are entitled to a deduction for the legal expenses you incurred in defending the legal action.
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