Private ruling: Legal expenses
Date of advice: 17 July 2017
Published: November 2017
Ruling period: Year ended 30 June 2017 | Year ended 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: Are you entitled to a deduction for legal expenses? | A1: No


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 (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. 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). For legal expenses to constitute an allowable deduction, it must be shown that they were incidental or relevant to the production of the taxpayer's assessable income, ( Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47). 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. Defending a right to practice a profession or employment is capital in nature, as the right to practice is considered a structural asset and the associated expenses are incurred to protect this right ( Case V140 88 ATC 874; AAT Case 4596 (1988) 19 ATR 3859 and Case X84 90 ATC 609; AAT Case 6258 (1990) 21 ATR 3721). As the nature of the expense follows the nature of the advantage sought, the expense is also capital in nature. In your case, you are taking legal action in relation to the decision of the regulatory body to revoke your authority to work as a financial planner, thereby curtailing your ability to carry out your previous employment duties. The legal action is sought to allow you to continue to derive assessable income in the course of your previous employment. The legal action seeks to bring into existence an asset or an advantage (tangible or intangible) for the enduring benefit of your employment. The benefit sought is therefore capital in nature ( British Insulated & Helsby Cables v. Atherton (1926) AC 205). Accordingly, the legal expenses are not deductible under section 8-1 of the ITAA 1997.

Relevant facts: You were employed by a company as a financial planner. | Your authority to provide advice and engage as a financial planner was revoked by your licensee. | The Australian Securities and Investments Commission (ASIC) made an order to ban you permanently from providing financial advice and services. | You formally lodged an appeal with the Administrative Appeals Tribunal (AAT) against the decision made by ASIC. | You declined the offer to apply to the AAT at the time to have the decision stayed, which meant the ban came into immediate effect. | A formal hearing before the AAT is set down. | The decision of the AAT will ultimately decide whether you are able to once again work and earn income as a financial planner. | You have incurred legal expenses in relation to the above.