Private ruling: Legal expenses
Date of advice: 23 October 2017
Published: March 2018
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Are you entitled to a deduction for legal expenses under section 8 - 1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Are you entitled to claim a capital loss for legal expenses? | A2: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 102-10 | Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 108-5

Reasons for decision: Detailed Reasoning - Are you entitled to a deduction for legal expenses?: Section 8-1 of the 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. For legal expenses to constitute an allowable deduction, it must be shown that they were incidental or relevant to the production of your assessable income ( Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431). The expenditure must therefore be related to the production of assessable income and not incurred at a point too soon to be deductible ( FC of T v. Maddalena (1971) 45 ALJR 426; 2 ATR 541; 71 ATC 4161). Also, in determining whether a deduction for legal expenses is allowable 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. In your situation, you were defending action taken by your previous employer to prevent you from working for another employer. The action by your former employer was to enforce a restraint of trade clause in your employment agreement. The action was not prompted or caused as a consequence of the performance of your then current duties. It is considered your legal expenses were incurred to enable you to continue working for your new employer. They did not relate to the duties of your previous employment or your new employment and therefore, not incurred in earning your assessable income from either. Defending a right to practice a profession or employment is capital in nature, and the expenses were incurred to protect this right ( Case 140 88 ATC 874; AAT Case 4596 (1988) 19 ATR 3859 and Case X84 90 ATC 609; AAT Case 6528 (1990) 21 ATR 3721). As the nature of the expense follows the nature of the advantage sought, the expense is also capital in nature. You are therefore not entitled to a deduction for legal expenses incurred to defend an application for restraint of trade. | Detailed Reasoning - Are you entitled to claim a capital loss for legal expenses?: Under section 102-20 of the ITAA 1997 you make a capital gain or capital loss as a result of a capital gains tax (CGT) event. CGT events are the different types of transactions or events involving a CGT asset. A CGT asset is: ● any kind of property; or ● a legal or equitable right that is not property. In your case, you are defending a right to practice a profession or employment which is capital in nature. However, not all things often referred to as rights will be assets for CGT purposes. To be an asset, a right must be recognised and protected by law. Personal liberties and freedoms, such as the freedom to work or trade, are not legal or equitable rights and accordingly will not be assets for CGT purposes. Therefore as your right to work is not considered a CGT asset, a CGT event does not occur and as a result you are not entitled to a capital loss for the legal expenses. There are no other provisions in the ITAA 1997 that allow a tax concession in your situation.

The advice in the Register has been edited and may not contain all the factual details relevant to each decision. Do not use the Register to predict ATO policy or decisions. | You applied for another position within the same organisation with another contractor. | Your former employer sued you for breach of contract and brought a court order against you preventing you from working anywhere in your field until the case could be heard. | You sought legal advice, had several attempts at negotiation and mediation, and the court ruled in favour of the agency. | You were left with extensive legal bills. | Your legal expenses included restraint of trade advice. | You have been forced to find work at a reduced rate.