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Ruling

Subject: Legal, travel, meal and accommodation expenses

Question

Are you entitled to claim a deduction for legal, travel, meal and accommodation expenses incurred?

Answer: Yes

If so, are the legal expenses deductible in the 20XX-XX financial year?

Answer: No

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

You were employed as coordinator of a department.

In March 20XX, you engaged a solicitor to act on your behalf in relation to allegations of misconduct brought by your employer.

The allegations that were made against you regarded breaches of; the Code of Conduct, the Public Administration Act, the Occupational Health and Safety Act, and other internal departmental policies and standards.

In April 20XX, you were formally advised by your employer that an internal misconduct investigation would commence to determine whether the breaches had occurred.

You incurred legal fees in order to defend yourself against the allegations. The invoice for the legal fees, dated July 20XX, detailed that;

· legal services were performed between March and June 20XX.

· the total fee for the services amounted to approximately $XX,000, however, the balance payable was approximately $XX,000 due to a pre-payment you had made.

You incurred travel, meal and accommodation expenses as part of the legal process to defend yourself against the misconduct charges.

As a result of the misconduct investigation, your employment was terminated.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Summary

You are entitled to claim a deduction for the legal, travel, meal and accommodation expenses you incurred in order to defend yourself against misconduct charges, as the expenses arose in defence of the performance of your duties from which you derived your assessable income.

Detailed reasoning

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.

Legal expenses

For legal expenses to constitute an allowable deduction, it must be shown that they were incidental or relevant to the production of your assessable income. Also, in determining whether a deduction for legal expenses is allowable, the nature of the expenditure must be considered. The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses.

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. The court accepted that the legal expenses incurred by the taxpayer in defending the manner in which he performed his duties were allowable. The activities which produced the taxpayer's income were what exposed him to the liability against which he was defending himself. 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 FC of T v. Day, 2008 ATC 20-064; 70 ATR 14, the taxpayer incurred legal expenses in defending charges in respect of conduct which occurred outside the course of his normal day-to-day duties. The Court found that on the facts of this case that legal expenses incurred by the taxpayer in relation to the disciplinary action taken by his employer are not outgoings of a private or domestic nature. Crucial to this view was the fact that the terms of employment, namely the various codes of conduct, standards, and policies and procedures imposed on public servants, exposed the taxpayer as an employee to the employer action, and therefore to the need to incur the expenses. Of significance was the fact that the legal expenses were incurred in responding to disciplinary action internal to the employment relationship and existing for no other purpose. The taxpayer was exposed to the action by reason of his employment as a public servant, and the consequences of the action only affected his employment. The occasion of the legal expenses was to be found in his position as an officer and it followed that the expenses were properly allowable as deductions.

Essentially, where employment or service requires that standards of conduct be adhered to by a taxpayer and, failure to do so could result in dismissal or reduction in salary, legal expenses incurred in defending disciplinary or legal action will be deductible.

In your case, you incurred legal fees in order to defend your conduct while performing the duties from which you derived your assessable income, including those duties as required of a public servant under the various codes of conducts, standards and policies and procedures implicit in those positions. Consequently, you are entitled to a deduction under section 8-1 of the ITAA 1997 for the legal expenses you incurred relating to this defence.

Travel, meal and accommodation expenses

In your case, as part of the process in defending your conduct while performing the duties from which you derived your assessable income, you incurred travel, meal and accommodation expenses in addition to your legal expenses.

It has already been established that there is a sufficient connection between the legal expenses you incurred and the gaining and producing of your assessable income. Therefore, the expenses you incurred for travel, meal and accommodation expenses, as part of the legal process in defending yourself against the misconduct investigation, are also allowable as deductions under section 8-1 of the ITAA 1997.

When expenses are incurred

The meaning of 'incurred' has been considered in Taxation Ruling TR97/7. While there is no statutory definition of term 'incurred' the ruling provides some general rules, settled by case law, which may assist in determining whether and when a loss has occurred and include that;

· a loss or outgoing may be incurred within section 8-1 even though it remains unpaid, provided the taxpayer is 'completely subjected' to the loss or outgoing. That is, it is not sufficient if the liability is merely contingent or no more than pending, threatened or expected, no matter how certain it is in the year of income that the loss or outgoing will be incurred in the future. It must be a presently existing liability to pay a pecuniary sum.

· in the case of a payment made in the absence of a presently existing liability (where the money ceases to be the taxpayer's funds) the expense is incurred when the money is paid.

In your case, you received an invoice dated for July 20XX. The invoice related to legal services performed in the 20XX-XX financial year.

At the end of the 20XX-XX financial year, the service provided by your solicitor was completed and at this stage it was only merely expected that you would incur a liability sometime in the future. While it can be said that the liability was properly referrable to the 20XX-XX financial year, the fact remains that at that time there was no presently existing liability. This liability did not become a presently existing liability until July 2011, the date of the solicitor's invoice. As such, you are not entitled to claim a deduction under section 8-1 of the ITAA 1997 for these legal expenses in the 20XX-XX financial year as they were not incurred or paid until the 2011-12 financial year.

The amount you paid in advance to engage the solicitor to act on your behalf is considered a payment made in the absence of a presently existing liability and consequently this expense was incurred when the money was paid. Therefore, if this amount was paid in the 20XX-XX financial year, you would be entitled to claim this amount of legal expenses as a deduction under section 8-1 of the ITAA 1997.

Similarly, your travel, meal and accommodation expenses would only be deductible in the year that the expenses were incurred. If no payable invoices were present, then the expenses are incurred when the expenses are paid. However, if an invoice is present, then the expense would be considered to be incurred in the financial year of the date of the invoice.