Private ruling: Legal expenses
Date of advice: 22 August 2018
Published: October 2018
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Are you entitled to a deduction for legal fees? | A1: No

Relevant facts and circumstances: You were employed by a company. You were initially hired as a sales consultant with the intention of promotion after 3-9 months to a sales manager role. You were to be offered a company directorship after demonstrating a level of competency and success as a sales manager. At the time you were offered the position the company had intended on being publically listed and you would be entitled to a share in the employee share scheme. You were promoted to commercial director and you were given a 10% shareholding in the company. A letter from the company dated X XXX 20XX set out allegations that were detailed and formed part of this ruling. On XX XX 20YY your lawyers sent a letter to the company informing them that you accepted the repudiation by the company and the contract was at an end. You reserved the right to claim damages against the company. In defending your employment your lawyers issued you with an invoice totalling $XX, XXX.XX and a further invoice $XXXX in relation to wrongful dismissal and recovery of wages.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1

Reasons for decision: Summary: 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. 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). 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). In each case the nature of the alleged misconduct, the scope of a taxpayer’s income earning activities and other existing circumstances, will determine whether the legal expenses are a deductible expense. Only legal expenses relating to the defence of actions performed in the natural course of a taxpayer’s business activities are allowable deductions. In Case W94 89 ATC 792; AAT Case 5376 (1989) 20 ATR 4001, the Administrative Appeals Tribunal held that expenditure incurred on legal fees in circumstances where the conduct of the taxpayer was not related to their income earning activities, was not 'incidental and relevant' to the gaining or production of the taxpayer's assessable income. In your situation, the legal expenses you incurred arose from your alleged personal conduct. They did not arise from the performance of your duties from which you derived assessable income. The expenses are private in nature, therefore you are not entitled to a deduction for legal expenses under section 8-1 of the ITAA 1997.