Private ruling: Legal expenses
Published: November 2014
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

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

Relevant facts and circumstances: You were charged with a criminal offence, which arose from a complaint made against you whilst in the execution of your employment duties. You enlisted the services of legal counsel. You were found guilty and convicted of the offence. You lodged an appeal which was granted and heard. The matter was found proven, but charges were dismissed as the incident occurred whilst in the execution of your employment duties. You incurred legal expenses in relation to the charges.

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) provides that a loss or an outgoing is an allowable deduction if it is incurred in producing assessable income or in carrying on a business for the production of assessable income unless that loss or outgoing is capital or of a private or domestic nature. 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) 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. In FC of T v. Rowe (1995) 31 ATR 392; 95 ATC 4691, an employee incurred legal expenses in defending the manner in which he performed his employment duties. The court accepted that such expenses were allowable and no significance was placed on the taxpayer's status as an employee. Accordingly, for legal expenses to be deductible, you have to be able to show that it was the very act of performing the prescribed or authorised activities of your employment that exposed you to the legal expenses. If it is something other than employment duties that exposed you to the legal expenses, the necessary nexus with the earning of assessable income cannot be established and the expenses are not allowable. You incurred legal expenses in defending yourself against charges that arose from a complaint made against you whilst performing your employment duties. The legal expenses are directly related to the performance of your duties from which you earned your assessable income. Therefore the legal fees are deductible under section 8-1 of the ITAA 1997.