Private ruling: Legal expenses
Published: February 2015
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a deduction for your legal expenses incurred? | 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 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 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. 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) 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) 31 ATR 392; 95 ATC 4691 , the taxpayer, an employee, was suspended from normal duties and was required to show cause why he should not be dismissed after several complaints were made against him. A statutory inquiry subsequently cleared him of any charges of misconduct or neglect. The court accepted that the legal expenses incurred by the taxpayer in defending the manner in which he performed his duties, in order to defend the threat of dismissal, were allowable. Since the inquiry was concerned with the day to day aspects of the taxpayer's employment, it was concluded that his costs of representation before the inquiry were incurred by him in gaining assessable income. In your case, you incurred legal expenses in relation to a complaint about your actions as a professional. It is accepted that the legal expenses incurred relate to defending the way you carried out your day to day income earning activities. That is, the legal expenses incurred are sufficiently connected to your income earning activities and are not capital or private in nature. It is accepted that the expenses are incidental and relevant to the gaining of your assessable income. Consequently, you are entitled to a deduction for your legal expenses incurred under section 8-1 of the ITAA 1997.

Relevant facts: You work as a professional. | After a complaint was made to an industry body you were advised that they had decided you had engaged in professional misconduct and commenced disciplinary actions. | As you believed that you had not been negligent in your duties, you applied for a review of the decision. | It was subsequently decided that the decision that you had engaged in professional misconduct be set aside.