Private ruling: Legal expenses
Published: November 2013
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012
Date scheme commenced: 1 July 2010

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 a loss or 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, or relates to the earning of exempt income. In determining whether a deduction for legal expenses is allowed 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 private nature, then the expenses incurred in gaining the advantage will also be of a private nature. The courts on a number of occasions have determined legal expenses to be an allowable deduction if the expenses arise out of the day to day activities of the taxpayer's business or employment. As you used the car on a day to day basis in the course of your employment, the legal expenses incurred in defending the dangerous driving charge arose as a consequence of your employment activities. However, your reason for defending the charge was to enable you to maintain your driver's licence (right to drive) and as a consequence, your job. The right to drive on public roads does not cease to be a private right merely because you are employed in some capacity which involves the use of the public road system (Taxation Determination TD 93/108). Accordingly, legal expenses are of a private nature if they are incurred to protect your right to drive a car, even if your employment requires you to hold a driver's licence ( Case P55 82 ATC 253; (1982) 25CTBR (NS) Case 109 and Case Q99 83 ATC 491; (1983) 27 CTBR (NS) Case 27). As you incurred the legal expenses to enable you to maintain your driver's licence, the expenses are private in nature. Therefore the legal expenses are not an allowable deduction.

Relevant facts: Your employment duties required you to drive a motor vehicle. | In the course of your employment you were involved in a car accident. | As a result of this accident you were found guilty of a dangerous driving charge. You appealed and were found not guilty. | In the course of defending the charge you incurred legal expenses. | You were of the view that if you had not been acquitted of the charge you would have lost your driver's licence and your job.