Private ruling: Legal expenses
Published: September 2013
Ruling period: Year ended 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 July 2012

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


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. 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 capital nature, then the expenses incurred in gaining the advantage will also be of a capital 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. The action out of which the legal expense arises has to have more than a peripheral connection to the taxpayers business and the expense may arise out of litigation concerning the taxpayer's professional conduct. In FC of T v. Rowe (1995) 31 ATR 392; 95 ATC 4691, an employee incurred legal expenses in defending the manner in which he performed his employment duties. The court accepted that such expenses were allowable and no significance was placed on the taxpayer's status as an employee. In the High Court decision in Federal Commissioner of Taxation v. Day [2008] HCA 53; (2008) 70 ATR 14; 2008 ATC 20-064 ( Day's case), the taxpayer was charged with breaching the standards of conduct and failing to fulfil his duty as a Customs Officer. It was found that the requisite connection with his assessable income was present and that he was exposed to the charges by reason of his office, including the obligation to observe standards of conduct, breach of which might entail disciplinary charges. It held that the legal expenses were allowable deductions and could not be viewed as private or domestic in nature. In your case you incurred legal fees defending a false accusation claim made against you by your employer. Similar to Day's case your expenditure on legal expenses was a consequence of your day to day activities as an employee from which you derived assessable income. Therefore the legal expenses incurred are an allowable deduction under section 8-1 of the ITAA 1997.

Relevant facts: You incurred legal fees in defending a false accusation claim made by your employer against you. | The seriousness of the accusation, if proved would have resulted in the termination of your employment. | As a result of what you considered to be the untruthful and unconscionable conduct of your employer, you sought legal advice. | The solicitor acting on your behalf communicated with your employer, reviewed the documentation available and briefed a barrister who wrote a response on your behalf. | The false accusation was unreservedly withdrawn. | You were charged legal fees, part of this fee was paid in the 2013 financial year and the remaining amount will be paid in the 2014 financial year.