Edited version of your written advice

Authorisation Number: 1013122867459

Date of advice: 10 November 2016

Ruling

Subject: Legal expenses

Question

Are you entitled to a deduction for legal expenses associated with seeking legal advice regarding your response to allegations of misconduct?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20YY

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

In 20XX your employer reviewed allegations made against you of misconduct.

You obtained legal representation to assist with defending your conduct.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

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, or relate to the earning of exempt income.

For legal expenses to constitute an allowable deduction it must be shown that they were incidental and relevant to the production of the taxpayer's assessable income (Ronpibon Tin NL and Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR47; (1949) 4 AITR 236; (1949) 8 ATD 431).

In Commissioner of Taxation v Day [2008] HCA 53, 2008 ATC 20-064, (2008) 70 ATR 14 (Day's case), the High Court considered the deductibility of legal expenses incurred by a public servant in defending charges in respect of conduct which occurred outside the course of the taxpayer's normal day-to-day duties. It was established that the taxpayer's position as an officer subject to the Public Service Act 1922 obliged him to observe standards of conduct extending beyond those in the performance of the tasks associated with his office and exposed him to disciplinary procedures within the Service which might have consequences for the retention of his office or salary.

In the circumstances of Day's case the majority of the High Court had regard to the nature of the employment, the terms and conditions of the employment and the tasks performed and duties to be observed under the employment. Of significance was the fact that the legal expenses were incurred in responding to disciplinary action internal to the employment relationship and existing for no other purpose. It was the terms of employment that exposed the taxpayer as an employee to the employer action, and therefore to the need to incur the legal expenses.

It was also held that the expenses were not of a private nature, because they were incurred in connection with the taxpayer's position as a public servant and were not unconnected to his service like some fines and penalties are.

Your case is similar to that of Day's case, in that you incurred a portion of your legal expenses responding to disciplinary action internal to your employment. Therefore, a portion of the expenses you incurred are deductible under section 8-1 of the ITAA 1997.

Further information

Apportionment of legal expenses

You were previously issued a private ruling relating to legal expenses you have incurred associated with the negotiations of a larger employment termination payment (ETP). These legal expenses were ruled to be not deductible.

The legal expenses for both the misconduct allegation and the ETP were incurred as part of the same action.

As your have incurred legal expenses that are deductible and not deductible you are required to apportion the legal expenses you incurred and only claim a deduction for the expenses associated with defending your conduct.

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