Private ruling: Deductions - legal expenses
Date of advice: 17 May 2022
Published: August 2022
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 ( ITAA 1997) for legal fees incurred to defend a driving charge? | A1: No.

Relevant facts and circumstances: You are employed to drive a vehicle. You were involved in an accident during work hours. You were given a penalty and a loss of demerit points by the police. There was a hearing in the Magistrates Court. The case was withdrawn and the penalty removed. Your barrister was confident of a favourable outcome as there was camera footage of the incident. You incurred legal expenses to defend the charge. You continued to carry out your work duties for the duration of the hearing.

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 outgoing to the extent to which it is incurred in gaining or producing your assessable income except where the loss or outgoing is a capital or private nature. In determining whether a deduction for legal expenses is allowable, 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 private nature, then the expenses incurred in gaining the advantage will also be of a private nature. In your case, you are employed as a driver and the legal expenses incurred in defending the driving charge arose as a consequence of your employment activities. Whilst 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 activities of the person's business or employment, it is considered that your reason for defending the charge was primarily to enable you to avoid demerit points being added to your driver's licence, which could have impacted on your right to drive. The right to drive on public roads does not cease to be a private right merely because the taxpayer is employed in some capacity which involves the use of the public road system (Taxation Determination TD 93/108). As explained in ATO Interpretive Decision 2002/692, legal expenses are of a private nature if they are incurred to protect a taxpayer's right to drive a car, even if their employment requires them to hold a driver's licence ( Case P55 82 ATC 253; (1982) 25 CTBR (NS) Case 109 and Case Q99 83 ATC 491; (1983) 27 CTBR (NS) Case 27). As you incurred the legal expenses in relation to a charge relating to your driver's licence, the expenses are private in nature. Although we acknowledge that you were merely carrying out your normal employment duties and were found to be not at fault, this does not change the private nature of the expense. Therefore, the legal expenses are not an allowable deduction under section 8-1 of the ITAA 1997.