Edited version of private ruling

Authorisation Number: 1011578086220

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Ruling

Subject: legal expenses

Are you entitled to a deduction for legal expenses incurred in defending criminal charges?

No.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You are currently employed as a manager.

While at home you were involved in an incident and were charged with two criminal offences.

You could not afford to have a criminal conviction recorded as you would be instantly dismissed from your current employment and would not procure another position in your industry.

Your employer directed you to seek legal advice and referred you to their legal firm for assistance.

You engaged a lawyer to defend yourself to avoid a criminal conviction and incurred legal expenses.

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent that they are incurred in gaining or producing assessable income, except where the outgoings are capital, private or domestic in nature.

In determining whether a deduction for legal expenses is allowable, the nature of the expenditure must be considered (Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 8 ATD 190; (1946) 3 AITR 436).

The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses. If the advantage to be gained is of a private nature, then the expenses incurred in gaining the advantage will also be of a private nature.

The courts, on a number of occasions, have determined legal expenses to be an allowable deduction if the legal expenses arise out of the day to day activities of the taxpayer's business or employment (Magna Alloys & Research Pty Ltd v. FC of T 80 ATC 4542; (1980) 11 ATR 276.

Also, in Federal Commissioner of Taxation v. Rowe (1995) 60 FCR 99; 95 ATC 4691; (1995) 31 ATR 392, an employee incurred legal expenses in defending the manner in which he performed his employment duties. The court accepted that such expenses were allowable and no significance was placed on the taxpayer's status as an employee.

The action out of which the legal action expenses arise has to have more than a peripheral connection to the taxpayer's business or income earning activities. The expenses may arise out of litigation concerning the taxpayer's professional conduct (Putnin v. FC of T 91 ATC 4097; (1991) 21 ATR 1245 and Elberg v. FC of T (1998) 82 FCR 440; 98 ATC 4454; (1998) 38 ATR 623).

In your circumstances, you obtained legal advice in defence of criminal charges brought about by an incident with your neighbour at your home. The reason for defending the charges was primarily to avoid a criminal record.

The legal expenses you incurred do not relate to charges arising out of actions you undertook in the course of the day to day activities of your employment. Even though you could be dismissed for having a criminal conviction, the nature of the charges relate to something unrelated to your employment duties.

Accordingly, the character of the legal expenses associated with this action is considered to be private in nature and not deductible under section 8-1 of the ITAA 1997.

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