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Edited version of your written advice
Authorisation Number: 1051318479476
Date of advice: 12 December 2017
Ruling
Subject: Deductions – legal fees
Question
Are the legal expenses regarding serious misconduct charges incurred deductible under section 8-1 of the Income Tax Assessment Act 1997?
Answer
Yes
This ruling applies for the following period:
Year ending 30 June 2017
Year ending 30 June 2018
The scheme commences on:
1 July 2016
Relevant facts and circumstances
You were an employee.
An incident occurred where you were charged with serious misconduct.
You incurred a significant amount of legal expenses.
Relevant legislative provisions
Income Tax Assessment Act section 8-1
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a loss or an outgoing is an allowable deduction if it is incurred in producing assessable income or in carrying on a business for the production of assessable income unless that loss or outgoing is capital or of a private or domestic 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. Day [2008] HCA 53 (Day) and FC of T v. Rowe (1995) 31 ATR 392; 95 ATC 4691,the courts 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.
The High Court found in Day that the legal expenses incurred by a taxpayer in relation to disciplinary action taken by their employer are not outgoings of a private or domestic nature. In your case, the terms of your employment exposed you as an employee to the employer action of the investigation and you therefore needed to incur legal expenses in defending the claims of serious misconduct. That is the proceedings were internal to your employment relationship.
Therefore the legal expenses you incurred defending the claims made against you are deductible under section 8-1 of the ITAA 1997.