Edited version of private advice

Authorisation Number: 1052016893022

Date of advice: 9 August 2022

Ruling

Subject:Deductions - legal expenses

Question

Are you entitled to a deduction for the legal expenses you incurred in defending your employment?

Answer

Yes. Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows for a deduction for a loss or outgoing to the extent that it is incurred in gaining or producing your assessable income. Accordingly, you are entitled to a deduction under section 8-1 of the ITAA 1997 for legal expenses you incurred if they are incidental to the production of your assessable income. The legal expenses that you incurred in preventing termination resulting from the investigation are incidental to the production of your assessable income. You are entitled to a deduction for the legal expenses.

This ruling applies for the following period:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You resigned from your employment in 20XX. You were obligated to give notice.

During the notice period you received a wage.

After handing in your resignation, you employer commenced an internal investigation against you.

The allegations were classed as 'serious misconduct' under the employer's internal disciplinary policy. There were a number of allegations that included, claims about failure to complete paperwork, conflicts of interest, and misuse of funds.

Serious misconduct carried the penalty of termination. If the investigation found misconduct your employment could have been terminated and you would have lost the remaining salary.

In documents from your employer, they indicated that making the claims would position them to dismiss you.

You engaged lawyers to argue there wasn't misconduct and to prevent your employment being terminated before the resignation period ended.

The action you were taking was to prevent a negative outcome of the investigation. The outcome you were seeking was for your employer to withdraw their charges.

Your employer continued their investigation and did not finalise it until after your resignation.

Your employer lodged their findings with another organisation, resulting in a reduction in grants.

You are continuing your action against the other organisation in court.

No income was withheld, and the appropriate benefits were paid to you.

You incurred legal expenses to defend your employment. You later incurred further legal expenses protect your reputation.

You did not have indemnity insurance.

Your lawyers have informed you that you have no legal recourse to claim your expenses from the employer.

You have paid the legal expenses.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1