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Edited version of your written advice
Authorisation Number: 1013139334145
Date of advice: 16 December 2016
Ruling
Subject: Deductibility of legal expenses
Question 1
Are you entitled to a deduction for legal expenses?
Answer
Yes
This ruling applies for the following periods
Year ended 30 June 20YY
The scheme commenced on
1 July 20XX
Relevant facts
You have been a registered in the medical field since xxxx and commenced employment. You were initially engaged to work on a permanent part time basis.
As per your letter of offer it had been agreed that you would be the point of contact for any after-hours advice.
Another person was appointed to the new position of Deputy Manager.
Prior to this appointment during your employment no complaints were raised in relation to your performance and you attained all performance measures.
During a period of months several instances occurred at work which you state affected your health and wellbeing.
After one such incident at work you advised your employer that you were leaving work.
You then attended your Doctor and lodged a Work Cover form with your employer.
Your claim for workers compensation was rejected.
You engaged the services of Lawyers to provide legal advice to assist you in your ongoing workplace dispute.
You subsequently signed a Deed of Release between yourself and your employer.
The Settlement Terms included:
(a) An amount equivalent to 12 weeks' pay …
(b) An amount equal to accrued annual leave; “
In return you agreed your employment will terminate by reason of your resignation.
You also agreed that you would discontinue the proceedings including filing a Notice of Discontinuance with the Fair Work Commission with respect to each of the proceedings.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1
Reasons for decision
Section 8-1 of the Income Taxation Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent they are incurred in gaining or producing assessable income except where the outgoings are 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 the taxpayer's assessable income, (Ronpibon Tin NL and Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431).
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.
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).
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).
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.
While you were not directly defending the way in which you perform your duties, it is accepted that the legal expenses are incidental and relevant to earning your assessable income. Therefore, the legal expenses are an allowable deduction under section 8-1 of the ITAA 1997.