Edited version of private advice

Authorisation Number: 1012680142005

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 20YY

The scheme commenced on

1 July 20XX

Relevant facts

You are an employee.

You engaged in a relationship with a fellow employee outside of work.

You ended the relationship but the other person did not want it to end.

You both engaged in the use of offensive and abusive language toward each other at work.

The other person made a formal complaint about you in relation to the threatening and abusive language.

Investigations were made into the complaint and you were summoned to your employer's office to formally consider the matter.

You subsequently lodged a formal complaint alleging sexual harassment by the other person.

Your employer concluded that the allegations against you were proven and the allegations against the other person were not.

You were subsequently dismissed.

You sought legal advice and the matter was taken the Fair Work Commission.

An Order was granted that you be reinstated; that your period of employment to have not been broken by the dismissal and that your employer pay you for loss of salary and wages resulting from your dismissal.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 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.

In determining whether a deduction for legal expenses is allowed, 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) 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 (1980) 49 FLR 183; (1980) 11 ATR 276; 80 ATC 4542).

Similarly, in FC of T v. Rowe (1995) 60 FCR 99; (1995) 31 ATR 392; 95 ATC 4691, the court accepted that legal expenses incurred in defending the manner in which a taxpayer performed his employment duties were allowable. No significance was placed by the court on the taxpayer's status as an employee.

In Case U102 87 ATC 621; AAT Case 72 (1987) 18 ATR 3515 the taxpayer took defamation action against comments made with regard to the management of a trust fund of which he was a trustee. It was found that the expenses were not incidental to the proper execution of the office of trustee but rather were to maintain the taxpayer's personal reputation.

In Case W94 89 ATC 792; AAT Case 5376 (1989) 20 ATR 4001 the taxpayer, a public servant incurred legal fees in defending and then appealing against disciplinary charges of improper conduct resulting from his compulsive gambling. It was found that the expenses incurred where not incidental or relevant to the gaining of the taxpayer's assessable income. It was the conduct of the taxpayer through his compulsive gambling which led to the charges which, in turn, led to him incurring legal costs. The expenses incurred were not incidental or relevant to the gaining of the taxpayer's assessable income.

The legal expenses you incurred resulted from your dismissal because of your personal behaviour toward another worker following the end of a personal relationship. They did not arise from the performance of your duties from which you derived assessable income. Therefore, the legal fees you incurred are not an allowable deduction.

The Commissioner of Taxation considers that expenses incurred in relation to an action for damages for wrongful dismissal, are capital in nature and not deductible (Taxation Determination TD 93/29 Income tax: if an employee incurs legal expenses recovering wages paid by a dishonoured cheque, are these legal expenses an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997?).

In your case, while we accept that as a result of the action, you also received salary and wages for the period of your dismissal, this does not change the nature of the advantage you sought. As previously stated, legal expenses relating to unfair dismissal are capital in nature. Additionally, the expenses did not relate to the performance of your duties but from your personal behaviour.

The legal expenses incurred are capital or private in nature and are therefore not deductible.