Private ruling: Deductibility of legal expenses
Date of advice: 10 January 2020
Published: March 2020
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are your legal expenses incurred defending a complaint before your profession's complaints committee tax deductible? | A1: Yes Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for a loss or an outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature. In determining whether a deduction is allowed under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered ( Hallstroms Pty Ltd v FC of T (1946) 72 CLR 634; 8 ATD 190 per Dixon J). The nature or character of the legal expenses follows the advantage which is sought to be gained by incurring the expenses. Where the legal expenses arise as a consequence of the day to day activities of a business, the object of the expenditure is devoted towards a revenue end and the legal expenses are deductible ( Herald & Weekly Times v FC of T 48 CLR 113; 2 ATD 169). Where, however, the expenditure is devoted towards a structural rather than operational purpose, the expenditure is of a capital nature and the expenses are not deductible ( Sun Newspapers Ltd v FC of T (1938) 61 CLR 337; 5 ATD 87). Your legal expenses were incurred to defend a complaint related to unsatisfactory professional conduct arising from your day to day business activity. By incurring the legal expense you sort to prevent a financial penalty. You were not defending your right to practise or matters related to defamation of character. The legal expenses in your case where incurred in gaining your assessable income and are not of a capital, private or domestic nature. Your legal expenses are therefore deductible under section 8-1 of the ITAA 1997.

Relevant facts and circumstances: You are a professional practitioner. You incurred legal expenses defending a complaint of unsatisfactory professional conduct made against you by your Profession Complaints Committee. Had the applicant been successful in making the complaint, you may have been issued with sanctions limited to a fine and an order to pay legal costs. In defending the complaint, you were not defending your right to practise. The complaint did not involve defamation of character. The complaint was made by a client who was not satisfied with the standard of your work in the legal matter you represented them in. You were required to defend yourself in the State Administrative Tribunal. The legal fees were incurred as a result of retaining legal counsel to defend against the claim. You successfully defended the complaint and the proceedings were withdrawn by the Profession Complaints Committee and dismissed by consent with each party agreeing to bear their own costs. The complaint did not result in any legal sanction being made against you.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1