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Edited version of private ruling
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Ruling
Subject: Legal expenses
Are you entitled to a deduction for legal expenses?
Yes.
This ruling applies for the following period
Year ended 30 June 2009
The scheme commenced on
1 July 2008
Relevant facts
You worked for your employer for many years.
Your employer asked you to move to a new role to manage a group of staff who had been identified as underperforming.
With a reorganisation and redefinition of roles most staff began to perform at a satisfactory level. A few however did not.
It was agreed that formal unsatisfactory performance steps would be started by you under the guidance of human resources to end their employment.
As soon as the unsatisfactory performance steps were commenced the staff involved made false allegations about you as a manager and submitted a formal complaint.
You had to defend yourself against charges of improper behaviour in the workplace while executing your duties as a manager and undertaking agreed actions in the workplace.
A formal enquiry was held into the allegations about your work as a manager and you were completely exonerated by the external investigator and the matter was dismissed.
Following the formal review, some of the complainants, who by this stage had all left their jobs, sought a right of appeal and submitted a new set of allegations about your actions in the workplace.
The employer decided that a reinvestigation would be held to look at the new allegations.
You again defended yourself in the workplace without support.
You engaged a lawyer to manage your response to the second set of workplace allegations, to prevent the complainants from making any further defamatory allegations in the workplace, and to ensure that the employer handled the matter in such a way that it honoured its duty of care to you as an employee.
A second enquiry was held after a lengthy period of delay. Your lawyer supported you and prepared documentation for that enquiry. The unfounded allegations were again found to have no substance and you were again cleared of all matters.
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) provides that a loss or an outgoing is an allowable deduction if it is incurred in producing assessable income or in carrying on a business for the production of assessable income unless that loss or outgoing is capital or of a private or domestic nature.
In determining whether a deduction for legal expenses is allowed 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) 8 ATD 190; (1946) 3 AITR 436).
Legal expenses are generally deductible if the expenses 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) 2 ATD 169) and the legal action has more than a peripheral connection to the taxpayer's income producing activities (Magna Alloys & Research Pty Ltd v. FC of T 80 ATC 4542; (1980) 11 ATR 276).
Similarly, in Federal Commissioner of Taxation v. Rowe (1995) 60 FCR 99; 95 ATC 4691; (1995) 31 ATR 392, the court accepted that legal expenses incurred in defending the manner in which a taxpayer performed their employment duties were allowable. The activities which produced the taxpayer's income were what exposed them to the liability against which they were defending themselves. No significance was placed by the court on the taxpayer's status as an employee.
In your case, you incurred legal expenses defending the way you carried out your employment duties. You are therefore, entitled to a deduction for legal expenses.