Private ruling: Legal expenses
Published: November 2014
Ruling period: Year ended 30 June 20YY | Year ended 30 June 20ZZ
Date scheme commenced: 1 July 20XX

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


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

Reasons for decision: Summary: Section 8-1 of the ITAA 1997 allows a deduction for a loss or an outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature. For legal expenses to constitute an allowable deduction, it must be shown that they were incidental or relevant to the production of your assessable income ( Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431). The expenditure must therefore be related to the production of assessable income and not incurred at a point too soon to be deductible ( FC of T v. Maddalena (1971) 45 ALJR 426; 2 ATR 541; 71 ATC 4161). Also, in determining whether a deduction for legal expenses is allowable under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered ( Hallstroms Pty Ltd v. Federal Commissioner 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. In your situation, you were defending action taken by your former employer to restrain you from using any confidential information. The action was not prompted or caused as a consequence of the performance of your then current duties. It is considered your legal expenses were incurred to enable you to get work in the same field but with a new employer. Defending a right to practice a profession or employment is capital in nature, as the right to practice is considered a structural asset and the expenses were incurred to protect this right ( Case 140 88 ATC 874; AAT Case 4596 (1988) 19 ATR 3859 and Case X84 90 ATC 609; AAT Case 6528 (1990) 21 ATR 3721). As the nature of the expense follows the nature of the advantage sought, the expense is also capital in nature. You are therefore not entitled to a deduction for legal expenses incurred to defend an injunction to restrain you from using confidential information.

Your former employer filed and was granted an injunction to restrain you from using any confidential information. | The injunction does not prohibit you from working with a competitor of your former employer that does not sell the particular product or from using information already in the public domain. | The injunction is not a restraint of trade and does not prohibit you from selling other products manufactured and distributed by competitors. | There are limited positions available to you given your skills are in a niche market.