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Edited version of your written advice
Authorisation Number: 1051424917878
Date of advice: 4 September 2018
Ruling
Subject: Legal expenses
Question
Are you entitled to a deduction for legal expenses?
Answer
Yes
This ruling applies for the following periods:
Year ended 30 June 20XX
Year ended 30 June 20XX
The scheme commences on:
13 April 20XX
Relevant facts and circumstances
You worked as a professional for over 20 years.
You were stood down from your employment in the 20XX income year, while allegations were investigated.
Formal investigations took place in relation to your work performance.
You sought legal representation to defend your work decisions and duties in relation to your position with the aim of being reinstated to this position.
You resigned from the position in the 20XX income year after a YY month investigation.
You were not covered by professional indemnity insurance to cover your legal expenses.
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 & 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. Day [2008] HCA 53 and 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.
In your situation you sought legal advice to defend allegations in relation to some work decisions and duties in your role.
Accordingly, you are entitled to a deduction for the legal expenses under section 8-1 of the ITAA 1997.