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Edited version of private ruling
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Ruling
Subject: Legal expenses
Question
Will you be entitled to a deduction for legal expenses incurred in allowing you to enrol in the training program?
Answer
No.
This ruling applies for the following period:
Year ending 30 June 2012
The scheme commences on:
1 July 2011
Relevant facts and circumstances
You work in a professional field.
In the past, you were enrolled in a training program which would provide you with a qualification to allow you to work as a specialist in that field.
You took legal action against your employers.
The college failed your assessments in the training program. You subsequently withdrew.
You would now like to complete the training program which would enable you to gain a higher income.
The college refuses to allow you to apply to resume training.
You believe that you will require legal action to persuade them to allow you to complete the training program.
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.
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 & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431).
The nature of the expenditure must also be considered (Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 8 ATD 190). The nature or character of the legal expense 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 expense incurred in gaining the advantage will also be of a capital nature.
In Case X84 90 ATC 609; AAT Case 6528 (1990) 21 ATR 3721, the Administrative Appeals Tribunal held that legal expenses incurred by a medical practitioner in defending charges brought against him at a Medical Disciplinary Tribunal inquiry, were not deductible under subsection 51(1) of the Income Tax Assessment Act 1936 (now section 8-1 of the ITAA 1997) because the expenditure was incurred to protect a structural asset, that is, their registration as a medical practitioner, and was of a capital nature.
In your case, the ultimate advantage you are seeking is enrolment in a program in order for you to achieve a qualification which will allow you to work as a specialist. The advantage you are seeking will provide you with a lasting benefit and is considered to be capital in nature. Therefore, the legal expenses incurred in relation to the enrolment are not an allowable deduction under section 8-1 of the ITAA 1997.
Alternative view
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 income earning activities of the taxpayer. The action out of which the legal expense arises has to have more than a peripheral connection to the taxpayer's current income earning activities.
In your case, you are employed in a professional field. The action out of which your legal expenses will arise is the enrolment in a training program which will allow you to work as a specialist in that field. Completion of this program, and therefore the gaining of a further qualification, will allow you to work in the future as a specialist. The training is related to your future income earning activities as a specialist rather than your current income earning activities. Therefore, the legal expenses which may be incurred in relation to the enrolment in the training program will not be an allowable deduction under section 8-1 of the ITAA 1997.