ATO ID 2001/27: Deductions and expenses: Legal expenses in course of employment
Date of decision: 6 October 1997
Business line: Small Business/Individual Taxpayers

Issue
Are legal expenses incurred by an employee in the course of employment an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. Legal expenses incurred by an employee in the course of employment are an allowable deduction under section 8-1 of the ITAA 1997.

Facts
The taxpayer, as part of their employment duties, was instructed to write a paper. Subsequently, the taxpayer was reprimanded for comments included in the paper. The taxpayer, being concerned about the possibility of being dismissed from the position as a result of the comments, sought legal advice.

Reasons for decision
Summary: Section 8-1 of the ITAA 1997 provides that a loss or an outgoing is an allowable deduction if it is incurred in producing assessable income or in carrying on a business for the production of assessable income unless that loss or outgoing is capital or of a private or domestic 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). Similarly, in FC of T v. Day [2008] HCA 53 and FC of T v. Rowe (1995) 31 ATR 392; 95 ATC 4691, the courts accepted that legal expenses incurred in defending the manner in which a taxpayer performed his employment duties were allowable. No significance was placed by the court on the taxpayer's status as an employee. The taxpayer has incurred legal expenses in defending themself against criticism of the taxpayer's work practices. The evidence indicates that, in carrying out the actions that led to the criticism, the taxpayer was doing no more than executing their employment duties. Consequently, the legal expenses incurred are an allowable deduction.

Legislative references: Income Tax Assessment Act 1997 section 8-1
Case references: FC of T v Rowe (1995) 31 ATR 392 95 ATC 4691
Subject references: Legal expenses