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Ruling

Subject: Legal expenses

Question 1

Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for legal expenses?

Answer

No.

Question 2

Does section 40-880 of the ITAA 1997 apply to your circumstances?

Answer

No. As the expense is private, not capital in nature, this provision does not apply.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on:

1 July 2009

Relevant facts and circumstances

You are a general practitioner.

You were found guilty for professional misconduct resulting from a complaint from a patient

You now have limitations on the patients you can treat.

You appealed the decision made by the medical board.

You incurred legal fee expenses in relation to the appeal.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1 and

Income Tax Assessment Act 1997 Section 40-880.

Reasons for decision

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.

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). For legal expenses to constitute an allowable deduction, it must be shown that they were incidental or 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).

In each case the nature of the alleged misconduct, the scope of a taxpayer's income earning activities and other existing circumstances, will determine whether the legal expenses are a deductible expense. Only legal expenses relating to the defence of actions performed in the natural course of a taxpayer's business activities are allowable deductions.

In Case W94 89 ATC 792; AAT Case 5376 (1989) 20 ATR 4001, the Administrative Appeals Tribunal held that expenditure incurred on legal fees in circumstances where the conduct of the taxpayer was not related to their income earning activities, was not 'incidental and relevant' to the gaining or production of the taxpayer's assessable income.

In your situation, the legal expenses incurred in defending the claim made by the patient arose from your personal conduct. They did not arise from the performance of your duties from which you derived assessable income (ATO Interpretive Decision ATO ID 2002/664). The expenses are private in nature, therefore you are not entitled to a deduction for legal expenses under section 8-1 of the ITAA 1997.

Section 40-880 of the ITAA 1997 allows a deduction over a period of 5 income years for capital expenditure you incur:

· in relation to your business

· in relation to a business that used to be carried on

· in relation to a business proposed to be carried on

· to liquidate or deregister a company of which you were a member, to wind up a partnership of which you were a partner or to wind up a trust of which you were a beneficiary, that carried on a business.

Your legal expenses are private, not capital in nature; therefore this provision does not apply to your circumstances.