ATO ID 2001/322: Legal Expenses and Credit Card Expenses
Date of decision: 27 August 2001
Business line: Small Business/Individual Taxpayers

Issue
Are credit card and legal expenses incurred by the taxpayer on behalf of the taxpayer's employer deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
No, credit card and legal expenses incurred by the taxpayer on behalf of the taxpayer's employer are not deductible under section 8-1 of the ITAA 1997.

Facts
The taxpayer was employed as a purchasing officer. The taxpayer was issued with a personal corporate credit card. The taxpayer used the card to incur expenses on behalf of the employer. These were general expenses, not expenditure for items required for the performance of the taxpayer's duties. The employer ceased business and the taxpayer was sued by the credit card company for the amount owing on the card. The taxpayer incurred legal expenses in defending the court action. The taxpayer settled the court action by paying an amount of money to the credit card company.

Reasons for decision
Summary: Section 8-1 of the 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. It must be considered, therefore, whether the legal and credit card expenses were incurred by the taxpayer in gaining or producing their assessable income. In Case W101 89 ATC 821; (1989) 20 ATR 3421 a taxpayer obtained a corporate credit card as required by his employer who directed him to charge to the credit card the air fares for three of the companies executives. Before the taxpayer could be reimbursed by the employer for these expenses the company went into receivership. The taxpayer initially resisted the attempts of the credit card company to recover the debt from him, but eventually paid the debt. The Tribunal disallowed the deduction claimed by the taxpayer for the cost of legal expenses and for the amount of the credit card debt he was required to pay. The outgoings were held not to have been incurred in the course of gaining or producing the taxpayer's assessable income. Rather, it was held that the expense could be regarded as more in the nature of a loan to the company. The circumstances are similar here in that the taxpayer obtained a credit card at the direction of the employer, and then used this card to incur expenditure on behalf of the employer. The expenses were incurred to meet the general expenses of the employer and did not relate directly to the performance of the taxpayer's duties. There is no evidence that there was any connection between the purchases made and the derivation of the taxpayer's assessable income. The expenditure was not incurred by the taxpayer in order to earn income as an employee. These expenses are therefore not deductible under section 8-1 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 section 8-1
Case references: Case W101 89 ATC 821 (1989) 20 ATR 3421
Subject references: Work related expenses Legal expenses Credit cards