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Edited version of your written advice
Authorisation Number: 1051506408787
Date of advice: 12 April 2019
Ruling
Subject: Legal expenses
Question
Are you entitled to claim a deduction for the costs you incurred in order to obtain a work permit under section 8-1 of the Income Tax Assessment Act 1997?
Answer
No
This ruling applies for the following period:
Year ended 30 June 2018
The scheme commenced on:
1 July 2017
Relevant facts and circumstances
You are currently employed.
Your driver’s licence was cancelled.
You required a work permit to enable you to continue to perform the duties of your employment, as your employment duties include the requirement to drive a motor vehicle.
Without the work permit, and the associated ability to drive a motor vehicle, your employment as a sales representative would be terminated, which would have caused you financial stress, and it would also have a resulted in a negative impact on your family life.
The only costs you incurred that were associated with the application for the work permit related to legal fees and court costs.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1
Reasons for decision
Summary
You are not entitled to a deduction for the costs you have incurred to obtain a work permit, as these costs you have incurred are a pre-requisite to the earning of assessable income, rather than costs you incurred in the course of earning assessable income.
Detailed reasoning
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 except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.
Legal expenses can be characterised as an outgoing on revenue account or an outgoing of a capital nature depending on the cause or purpose for which the legal expenses were incurred (Hallstroms Pty Ltd v.Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 3 AITR 436; 8 ATD 190).
In Herald & Weekly Times Ltd v. Federal Commissioner of Taxation (1932) 48 CLR 113; 2 ATD 169 (Herald & Weekly Times) it was held that the taxpayer, a newspaper publisher, was allowed a deduction for legal expenses incurred in defending damages claims against it on the basis that the expenses arose as a consequence of the taxpayer's income earning activities. Further, the deductible legal expenses were found to include the expenses incurred by the claimant, expenses incurred by the publisher and the damages payable by the publisher.
Another example of deductible legal expenses is where a landlord incurred expenses in defending a damages claim in respect to injuries suffered by a third party on the landlord’s rental property. In this case, there was a clear connection between the legal expenses incurred and the earning of rental income (ATO ID 2003/484).
Also, the ATO Interpretive Decision (ATO ID) 2002/208 explains the courts consideration of the meaning 'incurred in gaining or producing the assessable income'. In Ronpibon Tin NL Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; 56 ALR 785; 8 ATD 431 the High Court stated that:
'For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The words "incurred in gaining or producing assessable income" mean in the course of gaining or producing such income.'
The expenditure must therefore be related to the production of assessable income.
In your situation, you applied for a work permit, which was a required expense in order for you to be able to continue your employment, as your driver’s licence was cancelled.
Whilst it is acknowledged that without the work permit you would not have been able to continue in your employment position, the expenses associated with the work permit were a prerequisite to earning your income. These expenses were incurred at a point in time too soon and were not incurred in the course of earning income from your employment role as a sales representative.
As such, the expenses associated with obtaining the work permit are not deductible under section 8-1 of the ITAA 1997 because they were not incurred in gaining or producing assessable income.