Edited version of private ruling

Authorisation Number: 1011655470495

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Ruling

Are you entitled to a deduction for legal expenses relating to allegations of misappropriation of company assets for personal use and to obtain a personal benefit?

Yes.

This ruling applies for the following period

30 June 2009 to 30 June 2010

Relevant facts and circumstances

You are an employee of a state government agency.

You were suspended from duty in accordance with section 49 of the Public Sector employment and Management Act 2002.

The allegations made against you were as follows:

· You used your position to improperly dispose of your employer's assets and you misappropriated such assets for person use and benefit.

· You acted knowing violation of your employer's motor vehicle policy.

You engaged a solicitor to defend you against the allegations which you asserted were untrue and unfounded.

You want to claim a deduction for legal expenses.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 subsection 8-1(1)(a)

Reason for Decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for a loss or 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, or relates to the earning of exempt income.

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.

The character of legal expenses is not determined by the success or failure of the legal action (Case B31 70 ATC 148; 15 CTBR (NS) Case 93).

The nature or character of legal expenses follows the advantage that is sought to be gained by incurring the expenses (Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 8 ATD 190; (1946) 3 AITR 436). 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 the expenses arise out of the day to day activities of a taxpayer's employment duties. For example, in Federal Commissioner of Taxation v. Rowe (1995) 60 FCR 99; 95 ATC 4691; (1995) 31 ATR 392 (Rowe's case), the court accepted that legal expenses incurred in defending the manner in which a taxpayer performed his employment duties were allowable.

In the case of FC of T v. Day 2008 ATC 20-064; (2008) 70 ATR 14 (Day's case) it was determined that;

what is productive of assessable income in a particular case may need to take account of any number of positive or negative duties to be performed or observed by an employee or other salary-earner……

The respondent'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 task associated with his office and exposed him to disciplinary procedures within the service which might have consequences for the retention of his office or his salary. What was productive income must be understood in this light

He was exposed to … charges [with respect to his conduct, or misconduct, as an officer] and consequential expenses by reason of his office. The charges cannot be considered remote from his office, in the way that private conduct giving rise to criminal or other sanctions may be……..

The decision establishes that where the connection between the legal expenses and the income is identified as being incurred to answer allegations of breaching negative duties imposed under the terms of the employment this may also be sufficient to satisfy paragraph 8-1(1)(a) of the ITAA 1997. It may be generalised that where employment of service is conducted on the terms that standards of conduct be observed in a taxpayer's personal life on pain of dismissal or reduction in salary, legal expenses incurred in resisting civil disciplinary or legal action will be deductible.

Therefore, as in Day's case we consider the legal expenses relating to your defence against the allegations of misconduct are deductible under section 8-1 of the ITAA 1997.