Edited version of your written advice

Authorisation Number: 1012744429461

Ruling

Subject: Legal expenses

Question

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

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts

You have been employed in your current position for several years.

You were placed on special leave with pay until further notice after complaints were made about the way you were performing your duties.

You incurred expenses for legal advice.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Detailed reasoning

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for a loss or an outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature.

For legal expenses to constitute an allowable deduction, it must be shown that they are incidental or relevant to the production of the taxpayer's assessable income or business operations. Also, 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 follows the advantage that is sought to be gained by incurring the expenses. If the advantage to be gained is of a capital nature, then the expenses incurred in gaining the advantage will also be of a capital nature.

Legal expenses are generally deductible if they arise out of the day to day activities of the taxpayer's business (Herald and Weekly Times Ltd v. Federal Commissioner of Taxation (1932) 48 CLR 113; (1932) 39 ALR 46; (1932) 2 ATD 169 (the Herald and Weekly Times Case)) and the legal action has more than a peripheral connection to the taxpayer's income producing activities (Magna Alloys and Research Pty Ltd v. FC of T 80 ATC 4542; (1980) 11 ATR 276).

In FC of T v. Rowe (1995) 31 ATR 392; 95 ATC 4691, the taxpayer, an employee, was suspended from normal duties and was required to show cause why he should not be dismissed after several complaints were made against him. A statutory inquiry subsequently cleared him of any charges of misconduct or neglect. The court accepted that the legal expenses incurred by the taxpayer in defending the manner in which he performed his duties, in order to defend the threat of dismissal, were allowable. Since the inquiry was concerned with the day to day aspects of the taxpayer's employment, it was concluded that his costs of representation before the inquiry were incurred by him in gaining assessable income.

Taxation Ruling TR 2000/5 Income tax and fringe benefits tax: costs incurred in preparing and administering employment agreements states that costs associated with settlement of disputes arising out of an existing employment agreement including the cost of representation are an allowable deduction.

In your situation, it is accepted that the legal expenses incurred relate to defending the way you carried out your day to day employment duties. The dispute concerned the procedures in your current employment position.

It is considered that the legal expenses incurred are sufficiently connected to your income earning activities and are not capital or private in nature. It is accepted that the expenses are incidental and relevant to the gaining of your assessable income. Consequently, you are entitled to a deduction for your legal expenses incurred under section 8-1 of the ITAA 1997.

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