Edited version of your written advice

Authorisation Number: 1012924609487

Date of advice: 8 December 2015

Ruling

Subject: Work related expenses and court costs

Question and answer

Are you entitled to a deduction for legal expenses?

No.

This ruling applies for the following periods:

Year ending 30 June 2015

The scheme commenced on:

1 July 2014

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Your ex-spouse made allegations about you.

You were arrested.

No charges were laid.

Your work requires you to have a security clearance which does not allow you to have a criminal record.

Your employer gave you the option to go on leave without pay until you could be cleared of the allegations with nothing being placed on your employment records.

You were on leave without pay for a number of months.

Relevant legislative provisions

Income tax Assessment Act 1997 section 8-1.

Reasons for decision

Summary

In your circumstances the legal expenses did not arise out of any actions related to the day to day carrying on of your work duties.

The expenses were incurred in defending the allegations made against you by your ex-spouse which are of a private nature.

Therefore, the legal expenses are not a deduction under section 8-1 of the ITAA 1997.

Detailed explanation

Section 8-1 of the ITAA 1997 allows a deduction for all losses or outgoings to the extent to which they are incurred in gaining or producing assessable income, or are necessarily incurred in carrying on a business for that purpose. However, where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income they will not be deductible (subsection 8-1(2) of the ITAA 1997).

In determining whether a deduction for legal expenses is allowed 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.

In Herald & Weekly Times Ltd v. FC of T (1932) 48 CLR 113; (1932) 39 ALR 46; 2 ATD 169 the taxpayer, a proprietor and publisher of an evening newspaper claimed outgoings (for legal advice, defence cost and damages awarded) in connection with libels the newspaper had published. A majority of the Full High Court allowed the deduction since, firstly, publishing the newspaper was both the source of income and the cause of liability and, secondly, the risk of libel was a regular and almost unavoidable incident or inherent risk of publishing.

Case V116 88 ATC 737 is another example, where the taxpayer could claim incurred expenses as an allowable deduction. In this case the taxpayer was a solicitor who was member of a board of Directors of a company. The taxpayer incurred expenses in defending himself against defamation proceedings brought by the dismissed chairman of directors. The Administrative Appeals Tribunal held that a deduction for legal expenses was allowable on the grounds that the taxpayer in this case was defending himself against a claim that he had made defamatory remarks in the course of the performance of his duties. Therefore, the expenditure was incidental and relevant to the producing or gaining of the taxpayer's assessable income and was not private in nature.

On the other hand, in Case U102, 87 ATC 621 (Case U102), the taxpayer was a secretary-manager of a sporting club who was also a trustee of a fund set up to care for an injured member. The taxpayer claimed legal costs associated with prosecuting a person who allegedly made defamatory remarks about the management of the fund and commenced proceedings for defamation. The Administrative Appeals Tribunal held that a deduction for the legal expenses incurred by the taxpayer for the defamation proceedings was not allowable as these expenses were not incidental to the proper execution of the office of trustee. The proceedings were instituted to maintain the taxpayer's personal reputation.

This decision found in the Case U102 was also supported in AAT Case 5376 (1989) 20 ATR 4001; Case W94 89 ATR 792 (Case 5376). In this case the taxpayer, a public servant, was being considered by a promotional appeal committee for temporary transfer to a higher grade. His supervisor lodged a report on his improper conduct, as a result of which disciplinary charges were laid and proven, and the taxpayer was demoted. The taxpayer lodged an appeal but withdrew it the day before the hearing. The tribunal disallowed his legal fees on the ground that the expenditure, which related to the conduct of the taxpayer and subsequent disciplinary charges, was not incidental or relevant to the gaining of assessable income.

In Inglis v. FCT 87 ATC 2037 the taxpayer was employed as a permanent officer of the Commonwealth Public Service in the Parliamentary Library. She claimed a deduction for legal expenses incurred by her in the prosecution of civil actions brought against the Commonwealth and certain individuals. She claimed in these actions that new procedures in the library placed unwarranted restrictions on her. The actions, which were ultimately settled, were commenced by the taxpayer because she faced a loss of status and the prospect of her chances of promotion being blocked. Although she had been transferred "sideways", she suffered, in fact, no loss of income. The tribunal held that the expenses were deductible, after that the expenditure was incurred by the taxpayer in gaining or producing assessable income. It was held that the "gravamen" of the dispute that was reflected in the actions, of her "day to day situation" in the library, so that the expenditure was incidental and relevant to the work which produced her income.

Again in FC of T v. Rowe (1995) 131 ALR 622; (1995) 95 ATC 4691; 31 ATR 392 concerned a taxpayer who was employed as an engineer for the Livingston Shire Council. In June 1985 the taxpayer was suspended and required to show cause why he should not be dismissed by reason of several complaints against him. The taxpayer incurred legal costs as a result of engaging a solicitor and counsel to defend himself against dismissal during the course of a statutory Inquiry established under the Local Government Act 1936-1985 (Qld). It was held that the legal expenses were deductible to the taxpayer. As Burchett J. said at page 4702:

'On the question of the deductibility of the expenses incurred by the respondent at the inquiry, I note that the Committee of Inquiry saw these expenses as incurred by him in defending himself from dismissal from his employment. That view of the matter is, of course, correct. However, at another level, I think these expenses should be recognised as incurred by the respondent in defending the manner of his performance of his duties. It was only by so justifying himself that he could make a successful defence against dismissal. When the matter is seen in this light, it falls squarely within the rule discussed in Putnin v FCT (1991) 27 FCR 508; 21 ATR 1245. To adapt language there quoted at FCR 511 from Herald and Weekly Times Ltd v FCT (1932) 48 CLR 113 at 117-9, the liability in question was incurred, or the claim was encountered, because of the very act of performing the work by which the respondent earned assessable income. The activities which produced the assessable income were what exposed the taxpayer to the liability discharged by the expenditure. As the court said in Putnin at FCR 513, so here, 'the ... proceedings arose from the activities by which the taxpayer earned his income, the mode of his performance of a particular task carried out in the course of business operations." To put the same point in another way, the cause or the purpose of the respondent's incurring of the expenditure was his assertion that he had faithfully performed the duties by which he had earned assessable income.'

In applying the principles derived from the cases, the legal expenses must arise from the taxpayer's day to day performance by which you derive your assessable income. Furthermore, the legal expenses must have arisen from the duties that you perform to derive your income.

In your circumstances the legal expenses did not arise out of any actions related to the day to day carrying on of your work duties.

The expenses were incurred in defending the allegations made against you by your ex-spouse which are of a private nature.

The main reason for the legal expenses was to protect your name and reputation.

Therefore, the legal expenses are not a deduction under section 8-1 of the ITAA 1997.