Private ruling: Legal expenses
Published: November 2014
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015
Date scheme commenced: 1 July 2013

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

Relevant facts and circumstances: You were an employee. You took sick leave. Your employer requested you to release information to them with respect to your medical history. You engaged a lawyer to represent you.

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 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 are incidental or relevant to the production of the taxpayer's assessable income or business operations. 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. If the advantage to be gained is of a capital nature, then the expenses incurred in gaining the advantage will also be of a capital nature. 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 80 ATC 4542; (1980) 11 ATR 276). Taxation Ruling TR 2000/5 Income tax and fringe benefits tax: costs incurred in preparing and administering employment agreements states that expenses incurred by an employee to settle a dispute with their current employer over their employment conditions are incurred in earning assessable income and are therefore generally deductible. In Inglis v. FC of T 87 ATC 2037, an employee incurred legal expense in defending additional conditions and controls their employer imposed on their employment duties. The Deputy President accepted that these expenses were incidental and relevant to the work which produced their assessable income and were not excluded from deduction as private or domestic expenditure. In your case, your legal expenses were a consequence of defending the conditions of your employment. It is considered that your legal expenses are a consequence of your day to day activities as an employee from which you derived assessable income. Therefore the associated legal expenses are deductible under section 8-1 of the ITAA 1997.