Edited version of private advice

Authorisation Number: 1052314519263

Date of advice: 11 October 2024

Ruling

Subject: Legal expenses

Question

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

Answer

Yes.

The principal reason for incurring your legal expenses was defending the allegations against you in which directly related to you carrying out your employment duties. Therefore, these expenses are characterised as being of a revenue nature and you are entitled to a deduction under 8-1 of the ITAA 1997.

This ruling applies for the following period:

DD MM YY

The scheme commenced on:

DD MM YY

Relevant facts and circumstances

Employment

On DD MM YY, you commenced employment with the company (the company) as the specified role.

In the employment role you were responsible for leading and overseeing services in specified state network.

Complaints

In MM YY you made the first complaint to an Executive Director and Senior Legal Advisor of the company as to the conduct of your immediate manager.

Further complaints were made in MM YY. These complaints constituted a disclosure within the meaning of the section of the Act.

On DD MM YY, after returning to work following annual leave, the company directed you to not to attend or perform work, pending an investigation into allegations that you may have engaged in inappropriate workplace behaviours.

Between DD MM YY and DD MM YY, you were not provided with details of the alleged inappropriate workplace behaviour being investigated.

In MM of YY, you engaged lawyers to defend the adverse action taken by the company including:

•         Having regard to the continuation of the unlawful conduct towards you, they reiterated the demand that the company immediately withdraw the suspension.

•         Abandon the investigation into the allegations against you.

•         Provide a written apology to you for the harm the company, has imposed on your reputation, health and wellbeing.

Deed of release

On DD MM YY, you were informed that the company had become aware that you may have engaged in inappropriate workplace behaviours towards external and external stakeholders which may be in breach of code and conduct.

You were informed that an investigation would be undertaken into the conduct concerns (investigation) and was directed not to attend or perform work (suspension). You denied the conduct concerns.

Various correspondence was subsequently exchanged between your lawyer and the company relating to the matter and your employment.

On DD MM YY, your lawyers provided a letter to the company which raised concerns about the investigation and your suspension.

On DD MM YY, your lawyers provided a letter to the Secretary and the company alleging, among other things, that:

•         You had made disclosures qualifying for protection under the specified Act.

•         The investigation and suspension were reprisal action taken against you because you made the alleged reprisal action.

•         The company did not have a contractual right to suspend you.

•         On DD MM YY, your lawyers provided a letter to the company lawyers alleging, among other things, that:

-             Their letter of DD MM YY constituted a further disclosure qualifying for protection under the Act.

-             Further reprisal action had been taken against the employee by the company.

On DD MM YY, the companies lawyers provided a letter to your lawyers stating, among other things, that the investigation would be placed on hold and the suspension would continue while the company undertook an assessment of the alleged Act and alleged reprisal action.

Settlement sum was equal to XX weeks' pay being $XXXX paid and taxed as a non -excluded employment termination payment.

An amount equal to the employee's accrued but untaken annual lave and long service leave and any outstanding remuneration up to the termination date less applicable taxation.

You have notified the secretary by signing the deed you are resigning from your employment effective termination date DD MM YY.

The company will formerly conclude the investigation into the conduct concerns with no adverse findings recorded against you.

You agreed to not apply or in engage in any work which would directly relate or perform services as an employee or contractor within any entity of the company portfolio. Your employment file will be marked with words to the effect of not suitable for re-hire.

The company, officers, agents and employees will not make any statement or limitations derogatory of you and will not discredit or disparage you.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Question

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

Summary

The principal reason for incurring your legal expenses was defending the allegations against you, in which directly related to you carrying out your employment duties. Therefore, these expenses are characterised as being of a revenue nature and you are entitled to a deduction under 8-1 of the ITAA 1997.

Detailed reasoning

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.

A deduction for legal expenses by an employee depends on the particular facts of a case. For legal expenses to constitute an allowable deduction, it must be shown that they were incidental or relevant to the production of the taxpayer's assessable income, (Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; [1949] HCA 15; (1949) 4 AITR 236; (1949) 8 ATD 431).

Also, in determining whether a deduction for legal expenses is allowed under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered (Hallstroms Pty Ltd v. FC of Taxation (1946) 72 CLR 634; (1946) 3 AITR 436; (1946) 8 ATD 190). 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.

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).

The courts, on a number of occasions, have determined legal expenses to be an allowable deduction if the expenses arise out of the day to day income producing activities of the taxpayer (The Herald and Weekly Times Ltd v. FC of T (1932) 48 CLR 113). The action out of which the legal expense arises has to have more than a peripheral connection to the taxpayer's business or income earning activities. The expense may arise out of litigation concerning the taxpayer's professional conduct (Magna Alloys and Research Pty Ltd v. FC of T (1980) 11 ATR 276; 80 ATC 4542;Putnin v. FC of T (1991) 21 ATR 1245; 91 ATC 4097).

You were suspended from your role without explanation or the ability to return to work. Without the representation of a legal professional you would not have been able to defend yourself against the allegations.

The purpose of the representation was to resolve the allegations against you and return to employment role. It was not to seek compensation or cease your employment when the legal action commenced. The allegations directly related to your daily work duties in which you derived your assessable income.

Within the deed of settlement, you received payment for unpaid salary and leave entitlements. You did not receive a compensation payment or any other form of relief.

Therefore, you have demonstrated the legal expenses directly related to you defending your employment and a matter that was directly related to your daily work duties. Your legal expenses follow the advantage sought and, in this case, will be an allowable deduction under section 8-1 of the ITAA 1997.