Private ruling: Deductions - Legal expenses
Published: August 2013
Ruling period: Year ended 30 June 2011 Year ended 30 June 2012
Date scheme commenced: 1 July 2010

Ruling: Q1: Are the legal fees you incurred deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: You are an employee. You were the subject of a complaint of improper conduct at work. You were exposed to the action as a consequence of your employment and you were required to defend the proceedings to maintain your eligibility to be employed by your employer. You incurred legal costs in successfully defending the allegations.

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 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. 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. 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 a taxpayer's business or employment ( Magna Alloys and Research Pty Ltd v. FC of T (1980) 49 FLR 183; (1980) 11 ATR 276; 80 ATC 4542). In the High Court decision in Federal Commissioner of Taxation v. Day [2008] HCA 53; (2008) 70 ATR 14; 2008 ATC 20-064 (Day's case), the taxpayer was charged with breaching the standards of conduct and failing to fulfil his duty as a Customs Officer. It was found that the requisite connection with his assessable income was present and that he was exposed to the charges by reason of his office, including the obligation to observe standards of conduct, breach of which might entail disciplinary charges. It held that the legal expenses were allowable deductions and could not be viewed as private or domestic in nature. Similar to Day's case, the legal expenses you incurred arose because of your employment and were directly related to income derived, or expected to be derived, from your employment position. Therefore, as there is a sufficient connection between the legal expenses you incurred and the gaining or producing of your assessable income, you are entitled to a deduction for the legal expenses you incurred under section 8-1 of the ITAA 1997.