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Edited version of private advice
Authorisation Number: 1012648730076
Ruling
Subject: Legal expenses
Question
Are you entitled to a deduction for legal expenses?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2014
The scheme commenced on
1 July 2013
Relevant facts
You were an employee.
You left your employer and started employment with a new company which conducted a similar business.
Your former employer commenced legal action to prevent you from approaching any of your past customers.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Section 8-1 of the 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.
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 (Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431).
The expenditure must therefore be related to the production of assessable income and not incurred at a point too soon to be deductible (FC of T v. Maddalena (1971) 45 ALJR 426; 2 ATR 541; 71 ATC 4161).
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.
In your situation, you were defending action taken by your former employer to prevent you from approaching any of your past customers. The action was not prompted or caused as a consequence of the performance of your then current duties.
It is considered your legal expenses were incurred to enable you to continue working in your new employment. They did not relate to the duties of your previous or new employment and therefore were not incurred in earning your assessable income from either.
Defending a right to practice a profession or employment is capital in nature, as the right to practice is considered a structural asset and the expenses were incurred to protect this right (Case 140 88 ATC 874; AAT Case 4596 (1988) 19 ATR 3859 and Case X84 90 ATC 609; AAT Case 6528 (1990) 21 ATR 3721). As the nature of the expense follows the nature of the advantage sought, the expense is also capital in nature.
You are therefore not entitled to a deduction for legal expenses incurred to defend an application to prevent you from approaching any of your past customers.