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Edited version of your written advice
Authorisation Number: 1051308913910
Date of advice: 1 December 2017
Ruling
Subject: Legal expenses
Question 1
Can you deduct legal fees incurred in defence of claims made against you?
No
This ruling applies for the following periods:
Year ending 30 June 2017
The scheme commences on:
1 July 2016
Relevant facts and circumstances
You were an employee in the transport industry working in number of states.
A number of claims were raised against you by a Traffic authority
The claims related to offences committed in the course of your employment
You obtained legal representation to defend yourself in court
You lost a number of the claims made against you and received monetary fines and lost demerit points from your drivers` licence
You incurred substantial legal fees as a result of your legal defence
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 8-1
Detailed reasoning
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.
Therefore, in determining whether a deduction is allowable under section 8-1 of the ITAA 1997, the nature of the expense must be considered.
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, (Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431).
Further, legal expenses are generally deductible if the expenses 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).
In your case the objective purpose in defending the charges was to negate or minimise the consequences of your actions whilst being employed rather than in defence of how you actually carried out your duties as an employee.
In order to claim a deduction under Section 8-1 it must be incurred in gaining or producing the assessable income which is different from an outgoing that is incurred ‘in connection with’ or ‘for the purpose of’ gaining the relevant assessable income. (Commissioner of Taxation v Day [2008] HCA 53 236 CLR 163; 83 ALJR 68; 250 ALR 388).
Generally, where a legal expense is incurred in order to protect an individual from the consequences of activities that contravene the law, the expense cannot then be classified as “incidental and relevant” to the gaining or producing of assessable income, rather it can be seen as private or domestic in nature.
Conclusion
The legal expenses were incurred in direct relation to the charges imposed rather than the activity for gaining or producing the assessable income and therefore are not an allowable tax deduction as they must be considered of a private or domestic nature.