Edited version of private ruling

Authorisation Number: 1011623609471

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Ruling

Subject: legal expenses

Are you entitled to a deduction for legal expenses in relation to workplace bullying and harassment by your employer?

Yes.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You have been the subject of various instances of workplace bullying and harassment from your manager.

You attempted to resolve the issues in lodging harassment, discrimination and bullying reports with your employer in accordance with your employer's workplace policies and procedures with no success.

The issues impacted on your ability to carry out your day to day workplace activities.

You sought legal advice in an attempt to resolve the issues with your employer in particular in failing to exercise a duty of care relating to the bullying and harassment.

Your work duties were changed as a direct result of the bullying and harassment.

You requested a transfer within your employment to ensure you are not under the supervision of your manager.

You incurred legal expenses.

You are unsure that you will receive a reimbursement of these expenses.

You have provided copies of the following:

· your notice of grievances to your employer

· your employment performance review

· legal correspondence by your lawyer letter to your employer documenting the issues.

Reasons for decision

Summary

You are entitled to a deduction for the legal expenses you incurred which relate to workplace bullying and harassment by your employer as it is accepted these expenses were incidental and relevant to earning your assessable income.

Detailed reasoning

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.

In determining whether a deduction for legal expenses is allowed, the nature of the expenditure must be considered. 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) 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).

When the principal reason for incurring the legal expenses is defending the actions of the taxpayer in carrying out their employment duties through which they gain or produce assessable income, such expenses are characterised as being of a revenue nature and are deductible (Inglis v. FC of T 87 ATC 2037 and Case V116 88 ATC 737; AAT Case 4502 (1988) 19 ATR 3703).

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 his employment duties were allowable.

In your case, you were subject to bullying and harassment in the workplace which included performance management. You incurred legal expenses in respect of action to cease the bullying and harassment and to successfully undertake your employment duties.

While you were not directly defending the way in which you perform your duties, you were seeking to restore the conditions and environment of your workplace. It is accepted that the legal expenses are incidental and relevant to earning your assessable income. Therefore, the legal expenses are an allowable deduction under section 8-1 of the ITAA 1997.