Private ruling: Legal expenses
Published: July 2013
Ruling period: 1 July 2010 to 30 June 2014
Date scheme commenced: 1 July 2010

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

Relevant facts and circumstances: You are a company director. Your duties include drafting and verifying information booklets which are produced to assist with the sale of investments offered by the company. An investor commenced legal action against you and others in respect to representations made in an information booklet, and other statements/actions made by you and others, in relation to their investment.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1

Reasons for decision: Summary: You can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income except where the loss or outgoing is private in nature (section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)). 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 (the Herald and Weekly Times Case )) 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). In FC of T v. Rowe (1995) 60 FCR 99; (1995) 31 ATR 392; 95 ATC 4691, the court accepted that legal expenses incurred in defending the manner in which a taxpayer performed his employment duties were allowable. The activities which produced the taxpayer's income were what exposed them to the liability against which they were defending themselves. In preparing and verifying the information booklets and assisting with the sale of investments offered by the company, you were doing no more than executing your role as a director of the company. Consequently, you are entitled to a deduction for your legal expenses as they arise from the duties from which you produce your assessable income.