Edited version of private ruling

Authorisation Number: 1011859438644

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Ruling

Subject: Legal expenses

Question

Are you entitled to a deduction for legal expenses?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced on

1 July 2010

Relevant facts

You have been employed as a services officer for a large number of years.

You took leave from work with a work related injury.

As the result of your injury, you were advised by your doctor not to return to work on shift as it would exacerbate your injury.

When you returned to work you were deployed to an office based role.

You subsequently applied for and were appointed to a permanent position performing administrative duties.

You are a trained in a specific field and you used this qualification to work on projects where you received very positive feedback and accolades from management.

You made complaints and/or inquiries in relation to your employment, in particular:

· You were being micro managed

· You raised concerns that no new procedure for training and completion of post incident analysis reports had been instigated for the last 12 to 18 months and a post incident analysis needed to be completed with respect to an incident and

· That your work had been plagiarised regarding a business case.

You were directed to attend a meeting during which you were;

· advised that you were being stood down from duties pending your assessment by the medical officer because of your mental history was allegedly having an effect on your ability to make rational decisions.

· directed to attend an appointment with the medical officer and obtain clearance for duties and shift work in order to return to work

· to return to duties and shift work (in the event of medical clearance) instead of your usual duties. Pending this, you were to be stood down.

You attended the medical appointment and the doctor confirmed that you should not be exposed to the incidents which caused your illness but that you were fit to continue in your current administrative role.

You remain stood down from duties and receiving your base salary but not being paid allowances.

You are seeking to be reinstated to the position you won in a competitive process and which the medical officer stated that you were fit to continue.

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) allows a deduction for a loss or an 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.

A number of significant court decisions have determined that for an expense to be an allowable deduction:

§ it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. FC of T; (1958) 100 CLR 478), 

§ there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. FC of T, (1949) 78 CLR 47), and

§ it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore Co (WA) Pty Ltd v. FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).

For legal expenses to constitute an allowable deduction, it must be shown that they are incidental or relevant to the production of the taxpayer's assessable income or business operations. Also, 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 (Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 3 AITR 436; (1946) 8 ATD 190). 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) 39 ALR 46; (1932) 2 ATD 169) and the legal action has more than a peripheral connection to the taxpayer's income producing activities (Magna Alloys and Research Pty Ltd v. FC of T 80 ATC 4542; (1980) 11 ATR 276).

In FC of T v. Rowe (1995) 31 ATR 392; 95 ATC 4691, the taxpayer, an employee, was suspended from normal duties and was required to show cause why he should not be dismissed after several complaints were made against him. A statutory inquiry subsequently cleared him of any charges of misconduct or neglect. The court accepted that the legal expenses incurred by the taxpayer in defending the manner in which he performed his duties, in order to defend the threat of dismissal, were allowable. Since the inquiry was concerned with the day to day aspects of the taxpayer's employment, it was concluded that his costs of representation before the inquiry were incurred by him in gaining assessable income.

In your situation, you incurred legal expenses in relation to being reinstated to the position you had been undertaking and that you had won in a competitive process. The associated legal expenses were a consequence of defending your rights to perform the duties of the role. It is considered that your legal expenses are a consequence of your day to day activities as an employee from which you derived assessable income. Therefore the associated legal expenses are deductible under section 8-1 of the ITAA 1997.