Private ruling: Legal expenses
Published: June 2015
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to a deduction for the legal, accounting and associated fees incurred? | A1: Yes.

Relevant facts and circumstances: You work in an industry regulated by ASIC. ASIC sent you a notice to demonstrate why you should not be disqualified from your position. You incurred legal, accounting and other associated fees defending yourself in your position. You were successful in demonstrating why disqualification should not occur and you are continuing in your position.

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 all losses or outgoings to the extent to which they are incurred in gaining or producing assessable income. However, where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income they will not be deductible. 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. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 8 ATD 190). Legal expenses take the nature of an outgoing of a capital nature or an outgoing of a revenue nature from the purpose of incurring the expenditure. It is necessary to consider the reason for which legal expenses are incurred, that is the object in view when the legal proceedings were undertaken or the situation which impelled the taxpayer to undertake them. 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) 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 the High Court decision in Federal Commissioner of Taxation v. Day [2008] HCA 53; (2008) 70 ATR 14; 2008 ATC 20-064 ( Days case), Mr Day was charged with breaching the standards of conduct and failing to fulfil his duty as an officer. It was found that the requisite connection with his assessable income was present and that he was exposed to the charges by reason of his office. The majority approach in this case was that an expense will satisfy the test outlined in paragraph 8-1(1)(a) of the ITAA 1997 if the occasion of the expense is found in whatever is productive of actual or expected income. They indicated that a broad approach should be taken in determining what activities produced the actual or expected assessable income, and that it is not only the day to day tasks performed by the employee that gain or produce this income. In your case, you incurred legal, accounting and associated expenses defending actions undertaken in carrying out your duties through which your assessable income was gained. Therefore, your expenses are an allowable deduction under section 8-1 of the ITAA 1997.