Private ruling: Legal Expenses
Date of advice: 23 April 2018
Published: July 2018
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: Are you entitled to a deduction for legal expenses? | A1: Yes

Relevant facts and circumstances: You are a permanent xxxx employed as a xxxx with xxxx (employer). Your role xxxx An industrial dispute and complaint was lodged with xxxx against you by a co-worker in xxxx. Following xxxx conference on xxxx you were advised verbally by your xxxx that you had to seek approval to enter the xxxx office until the outcome of the investigation was finalised. On xxxx you received an email of a complaint lodged through the xxxx, advising you were under investigation for allegations of misconduct including bullying and harassment, and discrimination. This included the industrial dispute lodged with xxxx by one of the complainants in relation to a temporary recruitment and selection process for a position that a complainant was found to be unsuccessful. The email you received was from the xxxx employed by xxxx stating he was engaged by xxxx to conduct the investigation into the allegations against you. You sought legal advice and engaged lawyer to defend you due to the serious nature of the allegations and risk of disciplinary action being dismissal and termination of your employment. In xxxx your lawyer advised he was moving interstate and was unable to continue managing your case. He referred you to Lawyer xxxx of xxxx who specialised in these issues; you took your lawyers advice and engaged xxxx as your lawyer. Your lawyer assisted you throughout the investigation process acting on your behalf in defending your actions including sending correspondence to your employer regarding industrial law and your employment rights. Your lawyer assisted you in preparing and reviewing the written responses as well as attendance at an investigation interview. On xxxx you were provided with the outcome of the two investigation processes. The complaint in relation to the recruitment and selection process was found to be unsubstantiated. The outcome to allegations relating to bullying, harassment and discrimination you were required to “show cause” on 4 incidents that were found to be capable of substantiation. You were required to reply within 14 days of receipt of the letter. You were given alternate duties receiving your normal remuneration at the xxxx office and you were directed not to enter the xxxx office unless prior approval given until matter resolved. You were advised by your Lawyer xxxx to engage a Barrister to provide a response to the “Show Cause” due to the seriousness of the allegations and risk of dismissal and termination of employment. The Barrister worked collaboratively with your lawyer and invoiced your lawyer for his specific legal services. There was no double up of legal expenses and the Barrister’s hourly charges were the same hourly charge as your Lawyer’s. The Barrister specialised in industrial and employment law. You received a response on xxxx from your employer regarding your response to “Show Cause”. The outcome was a partial substantiation to one allegation that was considered low level and there was no disciplinary action. Your employer advised they would contact your lawyer to discuss your return to duty. You were advised to remain in your alternative duties until your professional development has been finalised and these discussions have taken place. On xxxx your lawyer responded to your employer’s letter in relation to your employment rights and conditions. Your lawyer also advised your employer of the “numerous findings and comments throughout the decision in relation to the credibility and character of the complainants and the deficiencies and flaws with the investigator conducting the matter, of serious note was the finding that a complainant gave false/misleading evidence to the investigator. On xxxx you and your lawyer attended a meeting with your employer to discuss your return to work. Your lawyer discussed your employment rights to return to your substantive position but would consider options as long as you were doing the same substantive role. Your employer provided no options to consider at the meeting but advised they would forward proposal/s to the lawyer. You accepted an offer from your employer to perform the same role xxxx office. You incurred legal expenses as a result of securing and maintain your employment rights with no loss of pay or other entitlements. Your employer accepted all conditions and you have maintained your permanent position. Your legal expenses were $xxxx. You are not seeking to recover legal costs from any other party.

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 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. Legal expenses are generally deductible if they arise out of the day to day activities of the taxpayer's business (Herald and Weekly Times Ltd v. Federal Commissioner of Taxation (1932) 48 CLR 113; (1932) 39 ALR 46; (1932) 2 ATD 169) and the legal action has more than a peripheral connection to the taxpayer's income producing activities ( Magna Alloys and Research Pty Ltd v. FC of T (1980) 49 FLR 183; (1980) 11 ATR 276; 80 ATC 4542). Similarly, in FC of T v. Day [2008] HCA 53 and FC of T v. Rowe (1995) 31 ATR 392; 95 ATC 4691, the courts accepted that legal expenses incurred in defending the manner in which a taxpayer performed his employment duties were allowable. No significance was placed by the court on the taxpayer's status as an employee. 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). In your case, it is accepted that there is sufficient connection between your legal expenses incurred in defending the allegations lodged against you and your employment. Therefore, you are entitled to a deduction for legal expenses as they are considered to be of a revenue nature and you are entitled to a deduction in relevant financial years.