Edited version of private advice

Authorisation Number: 1051577111586

Date of advice: 27 September 2019

Ruling

Subject: Legal expenses

Question

Are you entitled to a full deduction on legal expenses you incurred under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20xx

Year ended 30 June 20xx

Year ended 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

You agreed to a non-competition deed and confidentiality agreement when you were hired by your employer.

A few years after doing the role, the Company suspended you on allegations of serious misconduct.

The Company did not organise a disciplinary meeting which would have provided you an opportunity to respond.

A few months from suspension, you received summons from the Courts on a number of claims initiated by the Company and its related entities against you and other named defendants.

The claims against you were on breach of employment contract, breach of non-competition deed and breach of fiduciary duty.

You denied the allegations and claimed that your relevant actions were all in line with your duties and obligations and with the Company's business.

You resigned from your employment.

You gained employment with another entity shortly after resignation.

You incurred legal expenses in relation to the actions brought.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

In determining whether a deduction is allowable under section 8-1 of the ITAA 1997, the nature of the expense must be considered. An expense will satisfy the test outlined in paragraph 8-1(1)(a) of the ITAA 1997 if the occasion of the expense is found in whatever is productive of actual or expected income. The expenditure 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. Federal Commissioner of Taxation v. Day [2008] HCA 53; (2008) 70 ATR 14; 2008 ATC 20-064.

In the High Court's decision in Federal Commissioner of Taxation v. Day [2008] HCA 53; (2008) 70 ATR 14; 2008 ATC 20-064 (Days case), Mr Day was charged with breaching the standards of conduct and failing to fulfil his duty as an officer. It was found that the requisite connection with his assessable income was present and that he was exposed to the charges by reason of his office. The majority approach in this case was that an expense will satisfy the test outlined in paragraph 8-1(1)(a) of the ITAA 1997 if the occasion of the expense is found in whatever is productive of actual or expected income. They indicated that a broad approach should be taken in determining what activities produced the actual or expected assessable income, and that it is not only the day to day tasks performed by the employee that gain or produce this income.

In your case, the legal expenses have arisen out of a need to defend your actions in carrying out your income-producing employment activities. The occasion for the legal expenses is to be found in your employment with the Company and it is considered that the connection to your employment has been maintained. There has been no breakage in the nexus between the expenditure and your employment. Therefore, the legal expenses incurred will be deductible under section 8-1 of the ITAA 1997.