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Edited version of private ruling

Authorisation Number: 1011678061736

Ruling

Subject: Legal expenses

Question:

Can you claim a deduction for your legal expenses?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2008

Year ended 30 June 2009

The scheme commenced on

30 June 2007

Relevant facts

You were a lecturer in religion at an Australian University.

You practise an eastern religion.

The studies you conducted were very popular, attracting national and international under-graduate and post-graduate students.

You believe there had been a level of hostility from other lecturers, with predominantly Christian beliefs, towards you.

You lodged a religious discrimination complaint with the Anti-discrimination Commission. No Statement of Claim is lodged.

In your Affidavit, filed in relation to your complaint, you identified several instances of discrimination including:

A Deed of Settlement was made between you and the University.

Under the Deed, the University agreed to:

In return, you agreed to discontinue your discrimination complaint against the University with the Commission.

The ex-gratia payment was declared as assessable income in the income year you received it as part of your employment termination payment.

You incurred legal expenses in relation to your complaint over two income years.

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.

In determining whether a deduction for legal expenses is allowable under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered (Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 3 AITR 436; (1946) 8 ATD 190). The nature or character of the legal expenses generally follows the advantage which is sought to be gained by incurring the expenses.

In your case, you incurred legal expenses in relation to a complaint lodged with the Commission and the subsequent Deed of Settlement made with your then employer. The basis of your complaint is that you were discriminated against on religious grounds and this discrimination was in the form of failure to upgrade your position from part time to full time when your work load warranted it, invoking 'performance management' measures against you for no apparent reason, deliberately closing down your area of teaching and expertise and obstructing access to your research grants for relief teaching, travel and research assistance.

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 FC of T v Rowe (1995) 31 ATR 392; 95 ATC 4691, 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.

As a lecturer in religion, the basis of your complaint has more than a peripheral connection with your day to day work activities and, as part of your complaint relates to performance management measures, also concerns how you performed your employment duties.

Complaints lodged with the Commission do not generally include a statement of claim. Where the Commission finds a complaint of discrimination to be substantiated it is usual for the employer to take action to redress the loss or damage suffered by the employee as a result of the discriminatory conduct.

Taxation Ruling IT 2424 discusses the assessability of compensation payments made in respect of unlawful acts of discrimination. It states, at paragraph 18, that compensation paid to make up for salaries and allowances that would have been received but for the discriminatory conduct of the employer is considered income and liable to income tax in the year of receipt.

In your case, even though you were not required to lodge a Statement of Claim with the Commission, your complaint related to pay inequality and access to research and study grants. If you had continued with your complaint and it had been substantiated, any compensation paid by your employer to address the discrimination would have been assessable as a salary increase and grants. In addition, as part of your complaint included performance management measures, it is considered that the legal expenses were incurred in relation to your day to day employment duties.

Therefore, the legal expenses you incurred in lodging a complaint with the Commission and subsequent settlement of the complaint are an allowable deduction under section 8-1 of the ITAA 1997.

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