Private ruling: Deductibility of legal expenses
Date of advice: 15 November 2016
Published: March 2017
Ruling period: Year ended 30 June 20YY
Date scheme commenced: 1 July 20XX

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

Relevant facts and circumstances: You were employed as a Senior Officer. Your responsibilities included management of staff including performance reviews. You had to counsel a staff member about the quality of work they were producing. Your employer then advised you that there was a complaint lodged against you and that your employer had engaged a legal professional to investigate the complaint. You were advised that the investigation may result in disciplinary action being taken against you, up to and including the termination of your employment. Your employment was suspended in 20XX pending the investigation. As your employer had engaged a legal professional you felt you had no other choice but to also engage a legal professional to defend you as your employment was at stake. You engaged legal services to protect your employment and to preserve your legal position both during the course of the investigation and any disciplinary process which might flow from the investigation. The legal professional was engaged to help deal with the other legal professional, to prepare submissions and attend interviews with the opposing legal professional. After some time your legal professional sought to have the independent investigator removed and have you reinstated. You ultimately chose to resign from your position as you felt there was no avenue to resolve the dispute. You have paid for all your legal expenses.

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 all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. 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). Similarly, in FC of T v. Day [2008] HCA 53 and FC of T v. Rowe (1995) 31 ATR 392; 95 ATC 4691, the courts accepted that legal expenses incurred in defending the manner in which a taxpayer performed his employment duties were allowable. No significance was placed by the court on the taxpayer's status as an employee. You incurred legal expenses in defending yourself against criticism of your work practices. The evidence indicates that, in carrying out the actions that lead to the criticism, you were doing no more than executing your employment duties. Consequently, the legal expenses are an allowable deduction.