Edited version of private advice

Authorisation Number: 1051566019246

Date of advice: 26 August 2019

Ruling

Subject: Deductions - legal fees

Question:

Are legal expenses incurred in defending a charge of operating an aircraft in a careless manner against you deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes

This ruling applies for the following period:

Year ended 30 June 2018

Year ended 30 June 2019

The scheme commenced on:

1 July 2015

Relevant facts and circumstances

You were employed by the Australian airline Company A but were flying from Location 1 to Location 2 in Country A in summer 2015 in a commercial aircraft when an alleged weather-related breach of flight regulations occurred. This flight was a commercial flight where you were paid to perform the normal duties of a commercial pilot.

You were charged in summer 2016 by the civil aviation authorities with operating an aircraft in a careless manner. This was a criminal charge which had the potential to affect your ability to work as a commercial pilot. You were charged under Country A law as you were working in that countries airspace at the time of the alleged offence.

You elected to defend this charge and retained local legal counsel as the prosecution occurred in that country, as had the alleged offence. At the time you were living and working in Australia as a commercial pilot.

Eventually you were discharged without conviction. You have provided a professional opinion from a career consultant experienced in the airline industry which states that a criminal conviction 'impacts a pilot's ability to remain and to continue in their chosen career path'.

You have also provided a letter from another company which operates aircraft and hence employs commercial pilots. This states that a pilot who has a criminal conviction is unlikely to be considered for an interview if other candidates are available. This letter was provided to support your argument that a criminal conviction could have a detrimental effect on your career as a commercial pilot.

You have also provided a typical airline Aviation Security Identity Card (ASIC) application form which requires a National Criminal History Check as a precursor to the issue of a security clearance. Again, this was provided to support your argument that a criminal conviction could have a detrimental effect on your career as a commercial pilot.

You have paid the legal invoices incurred in defending this charge and now seek a ruling as to their deductibility as a necessary expense incurred in earning your assessable income.

Relevant legislative provisions

Income Tax Assessment Act 1997 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 FC of T v. Elberg (1998) 38 ATR 623 the legal expenses incurred by a doctor in defending criminal charges arising out of the conduct of her medical practice were found by the Federal Court to be deductible. The expenses were characterised as a natural incident of the conduct of the taxpayer's business as a doctor.

In your case, your employment exposed you as an employee to the action of the civil aviation investigation and you therefore needed to incur legal expenses in defending the allegation of a breach of flight regulations. 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.