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Ruling
Subject: Legal expenses
Question
Can you claim a deduction for legal expenses incurred in relation to a civil case and an Australian Securities and Investment Commission (ASIC) investigation brought against you in relation to the performance of your duties as a company director?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2010
Year ended 30 June 2011
The scheme commences on:
1 July 2009
Relevant facts and circumstances
You were a full time paid director of a company until the company was placed into receivership.
You received director's fees for your role. You did not hold shares in the company.
A civil case was brought against the directors of the company by the receivers. An investigation was also commenced by ASIC.
The court case brought against you was based on allegations that you failed to discharge your duties with the degree of care and diligence that a reasonable person would exercise if they were a director of that corporation in its circumstances.
You successfully defended the civil case and have received no further correspondence from ASIC.
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 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.
Legal expenses are deductible provided the legal action:
· arose out of, or concerns the day to day income producing activities of the taxpayer (The Herald and Weekly Times Ltd v. FC of T (1932) 48 CLR 113);
· is not undertaken to protect the taxpayer's profit-yielding subject;
· have more than a peripheral connection to the taxpayer's business (Magna Alloys and Research Pty Ltd v. FC of T (1980) 11 ATR 276; 80 ATC 4542; Putnin v. FC of T (1991) 21 ATR 1245; 91 ATC 4097);
· may arise out of litigation concerning the taxpayer's professional conduct (Magna Alloys and Research Pty Ltd v. FC of T (1980) 11 ATR 276; 80 ATC 4542; Putnin v. FC of T (1991) 21 ATR 1245; 91 ATC 4097);
When the principal reason for incurring the legal expenses is defending the actions of the taxpayer in carrying out their employment duties through which they gain or produce assessable income, such expenses are characterised as being of a revenue nature and are deductible (Inglis v. FC of T 87 ATC 2037; and Case V116 88 ATC 737; AAT Case 4502 (1988) 19 ATR 3703).
In your case, you were a director of a company who incurred legal expenses defending actions undertaken in carrying out your duties through which your assessable income was gained. Therefore, your legal expenses are an allowable deduction under section 8-1 of the ITAA 1997.