Edited version of private ruling

Authorisation Number: 1011812370489

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Ruling

Subject: deductibility of legal expenses

Questions and answers:

Are you entitled to a deduction for out of pocket legal expenses incurred?

Yes.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commenced on:

1 July 2009

Relevant facts and circumstances

A member of the public made an allegation of assault against you whilst you were on duty in your occupation.

You were subsequently charged with two offences.

These charges were made more than 1 year after the alleged incident.

You continued to work in your job in a full capacity and at no time were you suspended with or without pay due to these allegations.

CCTV footage and other evidence from the incident reinforced that these allegations could not be substantiated, however you believe the relevant authority sent this matter to Court to ensure the transparency of the investigation.

Following a X day trial you were found not guilty on both of these charges due to there being inadequate evidence submitted by the prosecution.

No costs were awarded to you by the Magistrate.

All solicitor fees incurred during this case were covered by the particular professional association and as such were granted to you following the relevant scrutiny, advice and assessment process.

The association guidelines, however, did not include the payment of all Counsel/Barrister fees. At the conclusion of the trial there was a balance due to be paid by you.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows you a deduction for certain expenses as long as they are incurred in the course of gaining or producing your assessable income. Where the expenses are of a capital, private or domestic nature, or relate to the earning of exempt income, however, a deduction is not allowed.

Legal expenses are generally deductible if they arise out of the day-to-day activities of your income-producing activities and the legal action has more than a minor connection to those activities.

In Elberg v. FC of T (1998) 82 FCR 440; (1998) 98 ATC 4454; (1998) 38 ATR 623 (the Elberg Case), a deduction for legal expenses incurred by a medical practitioner in defending criminal charges arising out of the conduct of her medical practice was allowed, because the expenses related to activities by which the taxpayer earned her income (even though they did not relate to the core activity of medical treatment).

Even though the above case deals with a taxpayer in business, the Full Federal Court in FC of T v. Rowe (1995) 60 FCR 99; (1995) 31 ATR 392; 95 ATC 4691, (the Rowe case) considered that the principles laid down by such cases can still be applied to taxpayers who are not in business.  In the Rowe Case, the taxpayer, an engineer employed with a shire council incurred legal costs in defending charges that he was negligent in the manner in which he executed his engineering duties.  An independent statutory inquiry subsequently cleared him of any charges of misconduct or neglect. The court accepted here, that legal expenses incurred in defending the manner in which a taxpayer performed their employment duties, were allowable. 

It is clear from case law that legal expenses will be an allowable deduction if the expenses arise out of the day-to-day activities of the taxpayer and are relevant to the performance of the taxpayer's duties. When the principal reason for incurring the legal expenses is defending the actions of the taxpayer in carrying out their employment duties through which they gain or produce assessable income, such expenses are characterised as being of a revenue nature and are deductible.

You were performing your normal employment duties when the alleged assault incident occurred. The legal action in question had more than a minor connection to your income-producing activities as the activities which produced your income were what exposed you to the charges you were defending. Furthermore, in your particular job, you are more at risk than the general population in being accused of assault or having to defend assault related charges arising from you carrying out your normal employment duties. By incurring the legal expenses, you were, as in the Rowe case, defending the way you carried out your employment duties.

It is considered that the facts in your case are comparable to the facts in the Rowe Case, and the Elberg Case. As such, the legal expenses you incurred are deductible under section 8-1 of the ITAA 1997.

Consequently you are entitled to a deduction for the out of pocket legal expenses you incurred in defending this charge.

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