Private ruling: WRE – legal expenses
Date of advice: 3 October 2017
Published: February 2018
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Are you entitled to a deduction for legal expenses? | A1: Yes

Relevant facts and circumstances: Incidents occurred in your workplace, which you believe were discriminatory and due to these actions you were prevented from fully carrying out the duties required in your role. You lodged a formal complaint with your employer in relation to the discriminatory actions which prevented you from fully completing your role due. You proposed a move to another area within the workplace, at the same level as a resolution to the complaint. You sought legal advice to assist with the formal complaint and the proposed resolution. Your complaint was resolved with your employer, with you retaining a position at the same level in another area of the same workplace. You incurred legal costs of $XXXX.

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 they are incurred in gaining or producing assessable income except where the outgoings are 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 the taxpayer's 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). 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. 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). 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). In Case X42, 90 ATC 352, the Administrative Appeals Tribunal (AAT) decided that the legal expenses incurred by a taxpayer in securing continued employment in relation to an age discrimination claim was an allowable deduction under section 8-1 of the ITAA 1997. The AAT allowed the deduction on the ground that, but for the legal fees, the taxpayer’s employment would have been terminated and therefore the legal fees had been incurred in gaining or producing the taxpayer’s assessable income. In your case, it is considered that you have incurred legal expenses in securing continued employment in relation to discrimination complaint lodged by you. As an outcome of incurring the legal expenses, you have resolved the issue and moved to a different area within your workplace, allowing you to carry out the duties required within your employment. As such the legal expenses incurred are considered to be of a revenue nature and are deductible.