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Edited version of private ruling
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Ruling
Subject: Legal expenses
Can you claim a deduction for legal expenses and costs incurred to defend a claim for damages as a result of your day to day employment activities carried out in your previous employment?
Yes.
This ruling applies for the following period
Year ended 30 June 2010
The scheme commenced on
1 July 2009
Relevant facts
You were an employee of a franchise company.
Your duties involved servicing franchisees of the company in their businesses.
Claims were filed by franchisees naming you as third defendant, in relation to your actions while an employee of the franchise company.
You incurred legal expenses and costs as a result of these actions.
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 to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature.
The courts on a number of occasions have determined legal expenses to be an allowable deduction if the expenses arise out of the day to day activities of the taxpayer's business. The action out of which the legal expense arises has to have more than a peripheral connection to the taxpayer's business and the expense may arise out of litigation concerning the taxpayer's professional conduct.
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.
In your case, you were required to defend a claim for damages made by franchisees of your former employer in relation to actions undertaken as part of your day to day employment duties. Therefore, you would be entitled to a deduction for the legal expenses and costs you incurred in relation to this action under section 8-1 of the ITAA 1997.
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