Private ruling: Legal expenses
Published: October 2014
Ruling period: Year ended 30 June 20XX
Date scheme commenced: The scheme has commenced

Ruling: Q1: Are you entitled to a deduction for the legal expenses incurred up to the date your employment was terminated? | A1: Yes. | Q2: Are you entitled to a deduction for the cost of a witnesses travel? | A2: Yes. | Q3: Are you entitled to a deduction for the cost of travel for another person? | A3: 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 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, 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. Further, legal expenses are generally deductible if they arise out of the day to day income producing activities of the taxpayer ( Herald and Weekly Ltd v Federal Commissioner of Taxation (1932) 48 CLR 113; (1932) 39 ALR 46; (1932) 2 ATD 169). The legal action must have more than a peripheral connection to the taxpayer's income producing activities ( Magna Alloys and Research Pty Ltd v FC of T (1980) 49 FLR; (1980) 11 ATR 276; 80 ATC 4542). In FC of T v Rowe (1995) ATR 392; 95 ATC 4691, an employee incurred legal expenses in defending the manner in which they performed their employment duties. The court accepted that such expenses were allowable as deductions. In Inglis v. FC of T 87 ATC 2037 an employee incurred legal expenses 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 situation, it is accepted that the conditions you experienced in your workplace impacted on your ability to carry out your day-to-day employment duties. You incurred legal expenses in respect of action to cease the harassment and to undertake your employment duties. While you were not directly defending the way you performed your duties, you were seeking to restore the conditions and environment of your workplace. It is accepted that the legal expenses are incidental and relevant to the way in which you produce your assessable income. Therefore, you are entitled to a deduction for the legal expenses you incurred up to the date you were terminated. However, while we accept that the child was too young to leave unaccompanied, expenses relating to the child are not related to producing your assessable income. The expenses for the child are considered to be private or domestic in nature and are therefore, not deductible.

Relevant facts: You have been employed as a professional for a number of years. | Your employment was terminated in mid 20XX. | During your employment you allegedly experienced a number of incidents involving certain staff members of the employer in relation to unacceptable behaviour that included sex discrimination, sexual harassment and racial discrimination. | You have taken the matter to the Federal court. | You have incurred legal costs during the relevant financial years. | You incurred costs in the 20XX financial year for travel and accommodation for a witness to come to give evidence in court proceedings. | The witness also travelled with a child who could not be left unaccompanied and you incurred travel costs for the child.