Private ruling: Deductions - legal expenses
Date of advice: 23 April 2026
Published: 15 June 2026
Ruling period: Year ended 30 June 20YY | Year ending 30 June 20YY
Date scheme commenced: 1 July 20YY

Ruling: Q1: Are you entitled to a deduction for legal expenses incurred in relation to the investigation? | A1: No.

Relevant facts and circumstances: You are employed. In mid-20YY allegations were made to State authorities. The allegations were not made in a workplace context, rather, they were in relation to your conduct outside the workplace. As a result of the allegations investigations by the authorities commenced. Investigations by the authorities found no evidence was identified to support the allegations and the matter was resolved with no adverse findings. On DD MM 20YY a subsequent mandatory notification was made to the regulation body who was required to undertake a mandatory investigation. You are required to be registered with the regulation body for your employment. You engaged legal representation to assist with the regulatory process, compile evidence from multiple sources, and mitigate the perceived threat to your livelihood. The investigation concluded with no adverse findings. On DD MM 20YY the regulatory authority concluded its investigation and decided no regulatory action was required as the allegations could not be substantiated. You incurred legal expenses in relation to the regulatory process. Throughout the investigation you remained actively employed on full pay and your registration was not conditional nor restricted in any way.

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 to the extent 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. 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. 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 ( Magna Alloys ); Putnin v. FC of T (1991) 21 ATR 1245; 91 ATC 4097 ( Putnin )). 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). A deduction for legal expenses by an employee depends on the particular facts of a case. 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] HCA 15; (1949) 4 AITR 236; (1949) 8 ATD 431). In Case U102 87 ATC 621; AAT Case 72 (1987) 18 ATR 3515 the taxpayer took defamation action against comments made with regard to the management of a trust fund of which he was a trustee. It was found that the expenses were not incidental to the proper execution of the office of trustee but rather were to maintain the taxpayer's personal reputation. In Case W94 89 ATC 792; AAT Case 5376 (1989) 20 ATR 4001 the taxpayer, a public servant incurred legal fees in defending and then appealing against disciplinary charges of improper conduct resulting from his compulsive gambling. It was found that the expenses incurred where not incidental or relevant to the gaining of the taxpayer's assessable income. It was the conduct of the taxpayer through his compulsive gambling which led to the charges which, in turn, led to him incurring legal costs. The expenses incurred were not incidental or relevant to the gaining of the taxpayer's assessable income. If the expenses were incurred in protecting the underlying profit yielding structure or assets of the income-earning activity, they are considered to be capital in nature and will not be deductible. Legal expenses incurred by a professional person in protecting their right to practise were held not to be deductible in the following cases. In Case V140 88 ATC 874; AAT Case 4596 (1988) 19 ATR 3859 ( Case V140 ), a solicitor was denied a deduction for legal expenses incurred in defending certain allegations before the Statutory Committee of the Law Society of New South Wales, concerning the solicitor's trust account. The Committee ordered the taxpayer be suspended from practice for a period of twelve months, and to pay the costs of the Law Society. The Administrative Appeals Tribunal (AAT) held that the payments made by the taxpayer were not deductible under subsection 51(1) of the Income Tax Assessment Act 1936 (ITAA 1936) as the payments were characterised as capital expenditure. In another case, the AAT held that legal expenses incurred by a registered professional in defending charges brought against him at a regulation body inquiry, were not deductible under subsection 51(1) of the ITAA 1936 because the expenditure was incurred to protect a structural asset that is, their registration as a registered professional (their right to practise). | Detailed Reasoning - Application to your circumstances: The legal expenses incurred by you in defending the investigation did not arise from the performance of your duties from which you derive assessable income. The costs were in respect of your continuing right to derive income through the practise of your profession. That right is a structural asset and the cost of defending or acquiring structural assets is a capital expense. Consequently, you are not entitled to a deduction under section 8-1 of the ITAA 1997 for the costs incurred in defending your right to practice. It is also considered that your legal expenses are not deductible on the basis that they are private in nature. This is because the legal expenses were incurred in defending allegations regarding your personal conduct outside the workplace, that is, outside of work hours. | Detailed Reasoning - Your contentions: In your private ruling application, your tax agent contends that your circumstances are distinguishable from those in Case V140 and another case as the legal expenses in those cases were incurred in protecting a structural asset. However, like the taxpayers in those two cases you incurred legal expenses in defending an investigation by a regulatory body of your profession which posed a threat to your right to practise. That is, as in those two cases, you also incurred your legal expenses in protecting a structural asset being your right to practise. Therefore, they are capital in nature and consequently not deductible. Your tax agent also contended that your circumstances are similar to those in Magna Alloys , Putnin and Federal Commissioner of Taxation v Day [2008] HCA 53 ( Day ). In Magna Alloys a company incurred legal expenses in defending the manner in which its directors undertook business activities on its behalf. In Putnin an accountant and registered trustee in bankruptcy incurred legal expenses in defending the manner in which they had administered an insolvent estate as part of carrying on their business. In Day the taxpayer, a Customs officer, incurred legal expenses in defending three sets of disciplinary charges brought against him by his employer, the Australian Customs Service: (1) The First Charge related to the alleged failure of the taxpayer to fulfil his duty as an officer in that he presented his official Customs identification card, in circumstances which were not work related, to gain access to a court officer in order to obtain information regarding a search warrant which had authorised a search of his workstation. (2) The Second Charges related to alleged failures of the taxpayer on various dates to fulfil his duty to accurately record attendance at work. (3) The Third Charges related to the alleged failures of the taxpayer to fulfil his duty as an officer in a number of instances, including that the taxpayer had failed to inform Customs of relevant information relating to a claim for a diesel fuel rebate by the partner of another Customs officer, had lent improper support and assistance to the other officer and was knowingly concerned in the creation of a false diary which supported the claim, had used a work vehicle for non-work related purposes, had falsely recorded his attendance records, and had failed to communicate certain information concerning an investigation into another person. It can be seen that in Magna Alloys , Putnin and Day , the conduct that was being investigated was directly related to their income-earning activity. In contrast, in your case, the conduct being investigated was your conduct outside the workplace. Therefore, we consider that your case can be distinguished from those 3 cases.