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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 were an employee.
As the result of an investigation into allegations of bullying, harassment and intimidation it was found that you had not contributed to an ethical and equitable service environment. It was recommended that disciplinary action be taken against you.
You deny the factual basis that led to the investigation findings.
You engaged a legal representative and submitted to the relevant authority that the actions being taken by your employer were a breach of the legislation and were unequitable, unfair and excessive.
Without admission of liability, you and your employer accepted terms and conditions of a Deed of Settlement. You agreed to resign your employment which resulted in an employment termination payment.
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.
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. The action out of which the legal expense arises has to have more than a peripheral connection to the taxpayer's business and the expense may arise out of litigation concerning the taxpayer's professional conduct.
In FC of T v. Rowe (1995) 31 ATR 392; 95 ATC 4691, an employee incurred legal expenses in defending the manner in which he performed his employment duties. The court accepted that such expenses were allowable and no significance was placed on the taxpayer's status as an employee.
You incurred legal expenses in defending allegations of bullying, harassment and intimidatory behaviour towards staff and volunteers. In carrying out the actions that led to the allegations, you were executing your employment duties. Consequently, the legal expenses incurred are an allowable deduction.