Edited version of your private ruling

Authorisation Number: 1012604106030

Ruling

Subject: Deductions - WRE - legal expenses

Question

Are you entitled to a deduction for legal expenses you incurred?

Advice/Answers

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20YY

Year ended 30 June 20ZZ

The scheme commences on:

The scheme has commenced

Relevant facts and circumstances

You provided services to an overseas entity (entity A). The place of employment was in an overseas country.

At the time you were initially employed the chief financial officer (CFO) of A provided information to you which was necessary for your role.

Entity A suspended employment of the CFO following the discovery of irregularities in actions performed by the CFO.

A short time after, entity A articulated their allegations against the CFO and the CFO was given supervised access to the records of entity A to enable them to prepare a response to the allegations.

Your duties at this time included providing the CFO supervised access to records at the office of entity A. You had no other interaction with the CFO after that time.

The CFO lodged a claim in an overseas court, claiming that certain amounts were due to them under their employment contract with entity A.

Soon after the CFO's employment was formally terminated by entity A.

Soon after the CFO's legal advisors lodged a subpoena requesting that you attend their overseas offices. However as you lived overseas you could not attend.

The CFO's legal advisors then lodged an amended complaint with the same overseas court joining you and others as defendants.

You received advice from lawyers in both the overseas country and in Australia, and based on that advice you claimed a lack of personal jurisdiction by the overseas court, and you did not defend the overseas court proceedings.

Sometime later the overseas court issued a joint and several default judgement against you and the other defendants for a substantial amount of money. A letter of demand was issued to you.

The CFO's legal representatives then issued a statement of claim against you in the Supreme Court in Australia. In response, your legal representatives advised the CFO's legal representatives that the overseas default judgement was not enforceable in Australia.

A short time later you lodged your defence in the Supreme Court.

The matter progressed for some time until the Supreme Court issued a judgement for security costs against the CFO to be paid within 28 days. The CFO failed to pay the security costs, and as a result the court has ordered a stay in proceedings.

You incurred legal expenses defending the statement of claims against you.

You believe that the only reason that you were added as a defendant in the court proceedings was because you had been contracted to work for entity A. Had you not have been required to interact with the CFO in that capacity you would not have had to incur legal costs in defending a claim against you.

You believe the legal costs are directly related to, and were only incurred in defending, your day-to-day activities required in earning your assessable income as an independent contractor engaged by entity A.

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 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 FC of T v. Rowe (1995) 131 ALR 622; 31 ATR 392; (1995) 60 FCR 99; 95 ATC 4691, an employee incurred legal expenses in defending the manner in which he performed his employment duties.

In affirming that the legal expenses were allowable, Beaumont J stated at page 4699:

'since the inquiry was centrally concerned with the day to day aspects of the respondent's employment, it ought to be concluded that the respondent's costs of representation before the Inquiry was incurred by him in gaining assessable income.'

 Further, Burchett J commented at page 4702:

'the legal expenses of the taxpayer were incurred by the taxpayer in defending the manner of his performance of his duties.  It was only by so justifying himself that he could make a successful defence against dismissal'

Taxation Ruling TR 1999/10 discusses the deductions allowable to Members of Parliament. The Ruling states that a deduction is allowable for legal expenses incurred by a Member in defending the day-to-day activities through which he or she gains or produces assessable income (work-related activities), if the losses or outgoings are not capital, private or domestic in nature.

Application to your case

In your case, you have incurred legal expenses in defending a statement of claim against you. The court proceedings were brought against you as you were a party involved (through your employment with entity A) in the process which led to the termination of the CFO's employment. As such, legal proceedings resulting from your involvement in that process is seen to relate to your day-to-day income producing activities.

Consequently, you are entitled to claim a deduction for the legal expenses that you incurred to defend the court action against you under section 8-1 of the ITAA 1997.

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