Edited version of private advice

Authorisation Number: 1051608194557

Date of advice: 15 November 2019

Ruling

Subject: Legal expenses

Question 1

Are you entitled to a deduction for your legal expenses?

Answer

Yes.

Question 2

Are you entitled to a deduction for your medical expenses?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

A workplace conflict between you and your employer's senior management triggered your employer to create a disciplinary review action in an attempt to dismiss you from your role.

You began experiencing authoritative workplace bullying which caused you to experience severe stress and anxiety which affected your mental health. This resulted in a number of visits to medical professionals.

You sought out for legal help to defend your position.

You started proceedings against your employer at the Fair Work Commission (FWC) for bullying, harassment, oppressive and unreasonable management action.

You have incurred a significant amount of costs in associated legal fees stemming from the dispute.

After a number of months, your employer terminated the disciplinary review with no adverse findings and proposed your role to be made redundant. This process has taken an emotional toll on you.

To avoid further legal expenses, emotional trauma and distress, you decided to expeditiously resolve the dispute with your employer. On mutual agreement your role was made genuinely redundant and you were paid a bona fide redundancy.

You sought legal expenses from the employer however the employer refused the request.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Legal expenses

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and 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.

In determining whether a deduction for legal expenses is allowed, the nature of the expenditure must be considered. The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses. If the advantage to be gained is of a capital nature, then the expenses incurred in gaining the advantage will also be of a capital 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).

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. 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 case, you were subject to bullying and harassment in the workplace. You incurred legal expenses in respect of action to cease the bullying and harassment and to successfully undertake your employment duties. While you were not directly defending the way in which you perform your duties, you were seeking to restore the conditions and environment of your workplace. It is accepted that the legal expenses are incidental and relevant to earning your assessable income and are an allowable deduction under section 8-1 of the ITAA 1997.

Medical expenses

Generally medical expenses have no direct connection to the gaining or producing of assessable income as the purpose of the expense is to return you to health. The expenses relate to a personal medical condition and are private in nature. Additionally it is a long standing principle that a taxpayer does not satisfy section 8-1 of the ITAA 1997 merely by demonstrating some casual connection between the expenditure and the derivation of income. What must be shown is a closer and more immediate connection.

It is acknowledged that your work conditions impacted your health. However, the expenses incurred in relation to your medical costs do not have the required nexus with the derivation of assessable income and are of a private nature. Therefore, you are not entitled to a deduction for your medical expenses under section 8-1 of the ITAA 1997.