Edited version of private advice

Authorisation Number: 1052405339293

Date of advice: 05 June 2025

Ruling

Subject: Legal expenses

Question 1

Can you claim a deduction for legal expenses incurred in relation to maintaining your position at the Port Authority ?

Answer 1

Yes. The principal reason for incurring your legal expenses was defending the allegations against you and to have the final warning revoked 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 periods:

Year ended 30 June 20xx

Year ended 30 June 20xx

The scheme commenced on:

20xx

Relevant facts and circumstances

Employment

You were employed as a Pilot.

Your employment commenced 20xx.

Part of your duties as a Pilot is being a risk-mitigation specialist, mitigating risks presented by large merchant vessels to the preservation of life, environment, assets and infrastructure.

Your work routinely involved embarking and disembarking vessels to facilitate their safe and efficient navigation through the state's compulsory pilotage waters, so to maintain clear shipping channels.

Incident

You were waiting to disembark a large vessel you had just piloted inbound from sea, when the interferences by port officers endangered the life and you intervened, and it resulted in a near miss.

In 20xx, during critical stages of a manoeuvre, a wharf officer caused interference on your radio operations channel.

After vessel had landed, you disembarked to the wharf and sought out the wharf officer to discuss the situation.

You requested an investigation into the matter.

During the investigation a complaint was made against you.

The investigation of the complaint resulted in disciplinary action against you found, and as a result you received final warning.

Legal action

You did not agree with the outcome of the investigation, so you sought assistance from your union.

The union sought counsel on your behalf from a specialist solicitor immediately.

You lodged a dispute, and this led to a conciliation meeting between yourself represented by the union and your employer.

The union guided you through the dispute process and sought specialist legal counsel on your behalf.

At conciliation, your employer refused to concede their decision to remove the final warning.

As the matter could not be resolved in the conciliation process you, proceeded applied for an arbitration hearing.

In agreement, with your union, you confirmed that the solicitor's invoicing would be made directly to/remitted by the union, which could be eligible for an industry bulk-rate discount, and in turn the union would invoice you directly for the parity-reimbursing payments referring directly to the solicitor's original invoices.

The arbitration hearing was held in 20xx and despite X of the X allegations being found unsubstantiated; the fifth allegation was found partially substantiated.

Due to the fifth allegation being found partially substantiated, the decision handed down was unfavourable, and final warning given to you was upheld.

You and the union were further counselled a solicitor and barrister regarding any potential for an appellate hearing.

With advice from the barrister, the union and yourself decided not to file an appeal against the decision.

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) 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 received a final warning from your employer, any further incidents or discretions would lead to your immediate termination from your employment.

The purpose of your legal expenses was to resolve the allegations against you whilst carrying out your employment. It was not to seek compensation but to return your employment conditions back to the conditions prior to the incident. The allegations against you, directly related to your daily work duties in which you derived your assessable income.

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.