Private ruling: legal expenses
Published: September 2011
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to a deduction for legal fees incurred during the conciliation process to avoid damage to your career? | A1: No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You raised concerns about the financial management of your employer and as a result you were stood down with pay while an inquiry was conducted. You contend there were no grounds for you being stood down and that it was harshly executed and without procedural fairness. You engaged the assistance of a legal representative to resolve the employment matter and to avoid damage to your career while the inquiry was being conducted. Your employer created a retrospective suspension and allegations of inappropriate behaviour towards other employees. No resolution had been sought after 10 weeks of you being stood down with pay. You made a submission of a general protection dispute with fair work Australia in an effort to resolve the matter. You employer responded to this action by terminating your employment. You issued a notice of discontinuance of the general protection dispute and replaced it with a remedy for unfair dismissal with fair work Australia. An agreement was subsequently made to settle the matter by way of a deed of release. You received a settlement payment of $XX and incurred legal expenses totalling $XX.

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 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. 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). For legal expenses to constitute an allowable deduction, it must be shown that they were incidental or relevant to the production of the taxpayer's assessable income, ( Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47). In each case the nature of the alleged misconduct, the scope of a taxpayer's income earning activities and other existing circumstances, will determine whether the legal expenses are a deductible expense. Only legal expenses relating to the defence of actions performed in the natural course of a taxpayer's business activities are allowable deductions. In Case W94 89 ATC 792; AAT Case 5376 (1989) 20 ATR 4001, the Administrative Appeals Tribunal held that expenditure incurred on legal fees in circumstances where the conduct of the taxpayer was not related to their income earning activities, was not 'incidental and relevant' to the gaining or production of the taxpayer's assessable income. In your situation, the legal expenses you incurred to avoid damage to your career arose from your personal conduct. They did not arise from the performance of your duties from which you derived assessable income (ATO Interpretive Decision ATO ID 2002/664). The expenses are private in nature, therefore you are not entitled to a deduction for legal expenses under section 8-1 of the ITAA 1997.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.