Private ruling: Deductions
Date of advice: 21 October 2025
Published: 8 December 2025
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to a deduction for legal fees to defend the allegations made by your employer? | A1: Yes. | Q2: Are you entitled to a deduction for various expenses you incurred in your defence relating to the allegations? | A2: Yes. | Q3: Are you entitled to claim a deduction for the medical expenses? | A3: No.

Relevant facts and circumstances: You are employed by Employer Z. You were summoned to a meeting by your supervisor and handed a letter informing you that alleged conduct by you was being investigated to determine whether it had breached the Employer Z Code of Conduct. You had no prior notice or any indication about the allegations or investigation prior to this meeting. The letter stated a number of allegations made against you and the relevant section of the Employer Z Code of Conduct. If it is determined that you have breached the Code, sanctions may be imposed on you. These sanctions are: • termination of employment; • reduction in classification; • re-assignment of duties; • reduction in salary; • deductions from salary, by way of fine; • a reprimand. You engaged a lawyer. You requested assistance with responding to the allegations / investigation, to defend your ongoing full-time permanent employment. The lawyer engaged barristers to assist with your matter. You did not pay the barristers directly as they were engaged by your lawyer. You incurred various expenses. The allegations were unconditionally withdrawn a number of months ago. You remain employed by Employer Z on an ongoing full-time permanent basis.

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. In determining whether a deduction for legal expenses is allowed, 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 this 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). | Detailed Reasoning - Application to your circumstances: You incurred legal fees which comprised your solicitor and barristers to defend the allegations. No court hearings occurred, and mediation was carried out. Employer Z as part of their settlement reimbursed you an amount toward your legal expenses. The Commissioner is satisfied that the legal expenses have the relevant connection with your income earning activities. You are entitled to a deduction for your legal fees under section 8-1 of the ITAA 1997. You are also entitled to a deduction for various other expenses under section 8-1 of the ITAA 1997. You are not entitled to a deduction for your medical expenses under section 8-1 of the ITAA 1997. Medical expenses are a private expense and not an allowable deduction under section 8-1 of the ITAA 1997.