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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 period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You are a manager at a bank.

Allegations were made against you claiming breeches of the Code of Conduct, Corporate Principles and Discrimination and Harassment and Workplace Bullying Policies.

The person making the allegations was in your team.

You incurred legal expenses in defending against the allegations.

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 all losses or outgoings to the extent to which they are incurred in gaining or producing assessable income, except to the extent that they are outgoings of a capital, 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 CLR47; (1949) 4 AITR 236; (1949) 8 ATD 431).

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 activities of the taxpayer's business or employment. The action out of which the legal expense arises has to have more than a peripheral connection to the taxpayer's business and the expenses may arise out of litigation concerning the taxpayer's professional conduct.

In Commissioner of Taxation v Shane Day [2008] HCA 53 (Days Case) the concern was with the deductibility of legal expenses incurred by a public servant in defending charges in respect of conduct which occurred outside the course of taxpayer's normal day-to-day duties.

It was established that the taxpayer's position as an officer subject to the Public Service Act 1922 was obliged to observe standards of conduct extending beyond those in the performance of the tasks associated with his office and exposed him to disciplinary procedures within the Service which might have consequences for the retention of his office or salary.

In the circumstances of Day the majority had regard to the nature of the employment and the tasks performed and duties to be observed under the employment. The legal expenses were incurred in responding to disciplinary action internal to the employment relationship and existing for no other purpose.

Of significance was the fact that the terms of employment exposed the taxpayer as an employee to the employer action, and therefore to the need to incur the legal expenses. It was also held that the expenses were not of a private nature, because they were incurred in connection with the taxpayer's position as a public servant and were not unconnected to his service like some fines and penalties.

Your case is similar to that of the Day Case, in that you incurred legal expenses in responding to disciplinary action internal to your employment relating to alleged inappropriate behaviour.

Therefore, the expenses you incurred are deductible under section 8-1 of the ITAA 1997.