Private ruling: Legal expenses
Date of advice: 3 July 2018
Published: September 2018
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2016

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

Relevant facts and circumstances: You were employed by a Government department. You were assigned to a position overseas. Your employer decided to reassign you to duties in Australia. The Department notified you that they had decided to commence an investigation in relation to you. You lodged a complaint with the relevant Government body alleging direct discrimination in contravention of the Disability Discrimination Act 1992 on the basis of a disability. You filed an urgent application for interlocutory relief with the relevant Government body, seeking orders to prevent the Department from relocating you to Australia. The judge declined the order and ordered you to pay the Department’s costs. You requested miscellaneous leave with pay. You were asked to resign from the Department. Without admission of liability, the Department and yourself have agreed to settle the Costs Order and the Complaint on the terms contained in a Deed of Release. The Department were ordered to pay you an early termination of posting payment. You transferred from the Department and commenced work with another Government agency after legal action was finalised.

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

Reasons for decision: Detailed Reasoning - Detailed Reasoning: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 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. 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. FC 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 income producing activities of the taxpayer ( The Herald and Weekly Times Ltd v. FC of T (1932) 48 CLR 113). The action out of which the legal expense arises has to have more than a peripheral connection to the taxpayer's business or income earning activities. The expense may arise out of litigation concerning the taxpayer's professional conduct ( Magna Alloys and Research Pty Ltd v. FC of T (1980) 11 ATR 276; 80 ATC 4542; Putnin v. FC of T (1991) 21 ATR 1245; 91 ATC 4097). When the principal reason for incurring the legal expenses is defending the actions of the taxpayer in carrying out their employment duties through which they gain or produce assessable income, such expenses are characterised as being of a revenue nature and are deductible ( Inglis v. FC of T 87 ATC 2037; and Case V116 88 ATC 737; AAT Case 4502 (1988) 19 ATR 3703). Accordingly, you are entitled to a deduction for legal expenses under section 8-1 of the ITAA 1997.