Edited version of your private ruling

Authorisation Number: 1012395633764

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Legal expenses

Question

Are you entitled to a deduction for legal expenses incurred in relation to your employer's breach of contract?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts

You are an employee.

You were assaulted at work.

You suffered both physically and mentally as a result of the assault.

You have since returned to work after the incident.

You are still working near the person who assaulted you.

You have requested your employer to move you away from that person.

This has not occurred.

You allege that conditions under your current employment agreement are not being met, for example, your employer is not providing a safe workplace environment, not eliminating discrimination in the workplace, not working towards improving workplace efficiency and productivity.

You have started proceedings with the Human Rights Commission seeking to be moved away from the person who assaulted you. The Commission can not award legal fees.

You have incurred expenses for legal fees.

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 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.

A number of significant court decisions have determined that for an expense to be an allowable deduction:

§ it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. FC of T; (1958) 100 CLR 478 (Lunney's case)), 

§ there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. FC of T, (1949) 78 CLR 47), and

§ it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore Co (WA) Pty Ltd v. FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).

For legal expenses to constitute an allowable deduction, it must be shown that they are incidental or relevant to the production of the taxpayer's assessable income or business operations. Also, in determining whether a deduction for legal expenses is allowable under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered (Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 3 AITR 436; (1946) 8 ATD 190). The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses. If the advantage to be gained is of a capital nature, then the expenses incurred in gaining the advantage will also be of a capital nature.

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; (1932) 39 ALR 46; (1932) 2 ATD 169 (the Herald and Weekly Times Case)) and the legal action has more than a peripheral connection to the taxpayer's income producing activities (Magna Alloys and Research Pty Ltd v. FC of T 80 ATC 4542; (1980) 11 ATR 276).

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. A statutory inquiry subsequently cleared him of any charges of misconduct or neglect. The court accepted that the legal expenses incurred by the taxpayer in defending the manner in which he performed his duties, in order to defend the threat of dismissal, were allowable. 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.

Breach of contract

Your legal expenses relate to your current employment contract and working conditions.

Taxation Ruling TR 2000/5 outlines the Commissioner's views on the costs incurred in preparing and administering employment agreements. A deduction is allowed for an employee for costs associated with settlement of disputes arising out of an existing employment agreement including the cost of representation. An employment agreement is a reference to an agreement between an employee and an employer regarding employment.

In Inglis v. FC of T 87 ATC 2037; and Case V116 88 ATC 737; AAT Case 4502 (1988) 19 ATR 3703, an employee incurred legal expense in defending additional conditions and controls their employer imposed on their employment duties. The Deputy President accepted that these expenses were incidental and relevant to the work which produced their assessable income and were not excluded from deduction as private or domestic expenditure.

In your case, you allege that your employer's actions hinder the performance of your day to day employment duties. As your employer has not provided a safe workplace and allowed for reasonable adjustments for your work situation, you are unable to effectively carry out your day to day employment activities.

It is accepted that the conditions you experienced in your workplace impacted on your ability to carry out your employment duties. The legal action relates to your employment conditions and the implementation of the workplace safety and discrimination policies.

It is considered that the dispute in the above matters is sufficiently connected to your income earning activities and is not capital or private in nature. While you were not directly defending the way in which you performed your duties, you were seeking to restore the conditions and safe environment of your workplace. It is accepted that the expenses relating to your employer's breach of contract are incidental and relevant to the gaining of your assessable income. The associated legal expenses are a consequence of defending your rights under your current employment agreement.

Consequently, you are entitled to a deduction for the associated legal expenses incurred under section 8-1 of the ITAA 1997.