Private ruling: Legal expenses
Date of advice: 10 November 2016
Published: March 2017
Ruling period: Year ended 30 June 201X | Year ended 30 June 201X
Date scheme commenced: 1 July 201X

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

Relevant facts and circumstances: You made a complaint against your employer about unacceptable behaviour. Subsequently, in mid-late 201X, you faced work performance procedures instigated by your employer and advised by personnel. You were advised that disciplinary action including possible termination were being considered by your employer. You were forced to incur legal expenses to defend these claims and to preserve your employment. After a lengthy suspension and responses to allegations your employer withdrew all allegations as not substantiated and insufficient evidence of a breach of your employment contract.

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 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. In determining whether a deduction for legal expenses is allowed under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered ( Hallstroms Pty Ltd v. FC 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. If the advantage to be gained is of a capital nature, then the expenses incurred in gaining the advantage will also be of a capital nature. The courts, on a number of occasions, have determined legal expenses to be an allowable deduction if the expenses arise out of the day to day income producing activities of the taxpayer ( The Herald and Weekly Times Ltd v. FC of T (1932) 48 CLR 113). The action out of which the legal expense arises has to have more than a peripheral connection to the taxpayer's business or income earning activities. The expense may arise out of litigation concerning the taxpayer's professional conduct ( Magna Alloys and Research Pty Ltd v. FC of T (1980) 11 ATR 276; 80 ATC 4542; Putnin v. FC of T (1991) 21 ATR 1245; 91 ATC 4097). 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). 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 their employment duties were allowable. No significance was placed by the court on the taxpayer's status as an employee. You incurred legal expenses in defending yourself against criticism of your work practices and not meeting performance expectations. It is accepted that the legal expenses are incidental and relevant to earning your assessable income. Consequently, the legal expenses are an allowable deduction under section 8-1 of the ITAA 1997.