Private ruling: Legal expenses
Date of advice: 2 February 2017
Published: June 2017
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20YY | Year ended 30 June 20ZZ
Date scheme commenced: 1 July 20WW

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

Relevant facts and circumstances: You were employed in a particular field. In early 20XX you were diagnosed with a serious illness and undertook surgery in that same month. After an extensive period of sick leave under medical supervision you wrote to your employer to advertise your position to be occupied while you recovered on sick leave. You continued to be paid your salary up to mid 20YY. In mid 20XX an investigation began against you. You engaged lawyers in mid 20XX. In mid 20YY you were called give evidence under summons. Your employer wrote to you in mid 20YY and terminated your employment. Your lawyers wrote to your employer in mid 20YY asking them to reconsider your termination. They wrote back in 20YY declining your request. You were brought before a committee to answer questions of alleged misconduct and inappropriate behaviour in mid 20YY. A final report was released on their findings and recommendations made in mid 20ZZ. To date there has been no further developments nor any formal charges made against you. You have incurred legal fees in defending this false accusation claim made by your employer against you.

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 were incidental or relevant to the production of your assessable income. Also, in determining whether a deduction for legal expenses is allowable, 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. 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. 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). In your case, it is accepted that you were required to defend the way in which you discharged your employment duties. Consequently you are entitled to a deduction for legal expenses relating to this defence.