Private ruling: Legal expenses incurred by a health and safety representative
Date of advice: 20 February 2019
Published: May 2019
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2017

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

Relevant facts and circumstances: You were elected as a health and safety representative at your workplace. One of the powers given to a health and safety representative is to issue a provisional improvement notice (PIN) if there is a contravention of the OH&S Act. Inspectors will then make a determination if the notices are valid and affirm them or invalid and cancel them. You issued PINs which were subsequently cancelled by the inspectors. You appealed the cancelation of the PINS. You incurred legal costs to assist with the matter. You have not been reimbursed by your employer and you will not receive any reimbursement.

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 your assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. A number of significant court decisions have determined that for an expense to be an allowable deduction: ● it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense ( Lunney v. FC of T ; (1958) 100 CLR 478), ● there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income ( Ronpibon Tin NL v. FC of T , (1949) 78 CLR 47), and ● it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income ( Charles Moore Co (WA) Pty Ltd v. FC of T , (1956) 95 CLR 344; FC of T v. Hatchett , 71 ATC 4184). | Detailed Reasoning - Legal expenses: In determining whether a deduction for legal expenses is allowed, the nature of the expenditure must be considered. 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 ( Hallstroms Pty Ltd v. FC of T (1946) 72 CLR 634; (1946) 8 ATD 190). Taxation Ruling TR 95/33 Income tax: subsection 51(1) - relevance of subjective purpose, motive or intention in determining the deductibility of losses and outgoings considers the decision of the Full High Court of Australia in Fletcher & Ors v. FC of T 91 ATC 4950; (1991) 22 ATR 613 and situations relevant in determining the availability of an income tax deduction. There must be a sufficient connection between the legal expenses and the activities which produce assessable income. To determine whether the legal expenses are deductible, regard must be given to all the circumstances. TR 95/33 considers the issue of whether a deduction would be an allowable deduction by considering the subjective purpose, motive or intention in making the outgoing. The essential character of an expense is a question of fact to be determined by reference to all the circumstances. It may be necessary to examine the taxpayer's subjective purpose where there is no obvious commercial connection with the business activity or where the expense does not achieve its intended result. If an arrangement has an independent pursuit of some other objective, for example, to support a personal hobby, then the outgoing may not be deductible. Where the expenditure is incurred for the purpose of securing an enduring benefit, rather than a revenue purpose, the expenditure is capital in nature and is not deductible ( Sun Newspapers Ltd v. FC of T (1938) 61CLR 337; 5 ATD 87; (1938) 1 AITR 403). Where there is a voluntary payment or the objective purpose for expending an amount is unclear, the subjective purpose is relevant in drawing a conclusion on what the purpose of the expenditure was to effect. The Commissioner of Taxation considers that expenses incurred in relation to an action for breach of a taxpayer's contract of employment where the essential character of the advantage sought relates to an enduring advantage that is of a capital nature, the expenses are capital in nature and not deductible (Taxation Determination TD 93/29 Income tax: if an employee incurs legal expenses recovering wages paid by a dishonoured cheque, are these legal expenses an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997? ). Legal expenses incurred in preserving employment rights are not deductible as they are considered to provide an enduring advantage and are therefore capital in nature. The conditions of employment are also related to the employment contract. Any expenses in relation to changes to work practices would also be capital in nature. In your case, you incurred legal expenses to appeal the cancellation of the PIN. One of your duties is to issue PINs when there are breaches of the OH&S Act. Personally incurring the costs to appeal the decision is above and beyond what is required in your role and did not arise as a consequence of your day to day income earning activities. These expenses are capital in nature. Consequently, the legal expenses you incurred are not deductable under section 8-1 of the ITAA 1997.