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Edited version of private ruling
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Ruling
Subject: Legal expenses
Question:
Are you entitled to claim a deduction for the portion of your legal expenses not reimbursed?
Answer: Yes.
This ruling applies for the following period
Year ended 30 June 2009
Year ended 30 June 2010
The scheme commenced on
1 July 2008
Relevant facts
After an incident at work, charges were made against you.
You engaged a solicitor to defend the charges and incurred legal expenses.
Your employer reimbursed part of your legal fees.
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) 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.
In your case, you were required to defend charges made against you as a result of an incident that occurred in relation to your day to day employment duties. Therefore, you would be entitled to a deduction for the legal expenses you incurred under section 8-1 of the ITAA 1997.
Section 51AH of the Income Tax Assessment Act 1936 states that where:
- a taxpayer is reimbursed in whole or in part in respect of an expense, and
- the reimbursement constitutes a fringe benefit, then
- the amount of the deduction that has been allowed or would have been allowed is to be reduced by the amount of the reimbursement.
The definition of a fringe benefit, in section 136(1) of the Fringe Benefits Tax Assessment Act 1986, includes a benefit provided to an employee by an employer during the year.
In your case, your employer reimbursed you, in part, for your legal expenses. Therefore, any deduction claimed for legal expenses will need to be reduced by this amount.