Private ruling: Legal expenses
Published: February 2013
Ruling period: Year ended 30 June 2012 | Year ending 30 June 2013
Date scheme commenced: 1 July 2011

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

Relevant facts and circumstances: During your employment you experience a number of incidents involving certain staff members in relation to unacceptable behaviour that included harassment and discrimination. You lodged an internal complaint with your employer setting out the unacceptable behaviours by work colleagues. Your employer dismissed these allegations after having an external consultant carry out enquiries. You sought legal advice with workplace lawyers. You lodged a complaint with a government authority against your employer and the work colleagues for discrimination and harassment in the workplace. You state that the discriminatory actions had impacted on your ability to carry out your work. You sought to have an apology, promotional opportunities, no further victimisation and removal of your offenders. You did not seek any compensation other than to cover legal expenses from your employer in relation to these matters. You have received no payment from your employer. You have provided a copy of the complaint lodged. Your complaint was terminated on the grounds that they are satisfied that there is no reasonable prospect of the matter being settled by reconciliation.

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. 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). It follows also that the character of legal expenses is not determined by the success or failure of the legal action. 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 which relate to your workplace harassment under section 8-1 of the ITAA 1997.

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