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

Ruling: Q1: Are you entitled to a deduction for legal expenses? | A1: No.


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. The courts on a number of occasions have determined legal expenses to be an allowable deduction if the expenses arise out of the day to day activities of the taxpayer's business. The action out of which the legal expense arises has to have more than a peripheral connection to the taxpayer's business and the expense may arise out of litigation concerning the taxpayer's professional conduct. In FC of T v. Rowe (1995) 31 ATR 392; 95 ATC 4691 ( Rowe's case ), 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. In a High Court decision in Federal Commissioner of Taxation v. Day 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. He was suspended without pay. 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. As highlighted in Day's case , the incurring of expenditure by an employee to defend a charge because it may result in dismissal may not be sufficient in every case to establish the necessary connection to the employment or service which is productive of income. Much will depend upon what is entailed in the employment and duties of the employee. Whether expenses are incurred in gaining or producing assessable income looks to the scope of the operations or activities and the relevance to any legal expenses incurred. The scope of a taxpayer's employment is a question of fact and degree. However, if the expenses were incurred in protecting the underlying profit yielding structure or assets of the business they are considered to be capital in nature and will not be deductible. In Case V140 88 ATC 874; AAT Case 4596 (1988) 19 ATR 3859 ( Case V140 ), A solicitor was denied a deduction for legal expenses incurred in defending certain allegations before the Statutory Committee of the Law Society of New South Wales, concerning the solicitor's trust account. The Committee ordered the taxpayer to be suspended from practice for a period of twelve months, and to pay the costs of the Law Society. The Administrative Appeals Tribunal (AAT) held that the payments made by the taxpayer were not deductible as the payments were characterised as capital expenditure. Further, in Case X84 90 ATC 609; AAT Case 6528 (1990) 21 ATR 3721 (Case X84 ), the AAT held that legal expenses incurred by a medical practitioner in defending charges brought against him at a medical Disciplinary Tribunal inquiry were not deductible because the expenditure was incurred to protect a structural asset, that is, their registration as a medical practitioner, and was of a capital nature. Your case can be distinguished from Rowe's and Day's cases as you were not defending the manner in which you performed your duties. Rather the expenses you incurred were in attempting to removing your name from the register and thereby reinstating your right to practice. Similar to Case V140 and X84, your right to practice is part of the profit yielding structure. The legal expenses incurred in protecting that structure is of a capital nature. Therefore, you are not entitled to a deduction for legal expenses.

Relevant facts: The arrangement that is the subject of the private ruling is described below. This description is based on provided documents. These documents form part of and are to be read with description. | You are employed as a staff specialist. | You were using a different method for testing. | A complaint was lodged raising concerns about the method you were using for testing. | In 20XX your professional privileges were suspended with pay while an independent review was conducted the panel. | Your name was recorded on the Register. | A Clause of the Register refers to your being suspended during or at the conclusion of an investigation into a serious disciplinary matter involving an allegation of unsatisfactory professional conduct or professional misconduct . | You engaged a lawyer to have your name withdrawn from the register. | You first lodged a claim in a court in 20XX and an amendment in 20XX. | You claimed that on completion of the investigations the report did not conclude or make a recommendation that the information available was likely to contribute to a conclusion of unsatisfactory professional conduct and the independent review was not investigating into a serious disciplinary matter and the entry to the register is invalid, void and ultra vires. | You have signed a Deed of release that includes: | · Ceasing of your suspension | · Undertaking a period of refresher training | · To return to full duties on satisfactory completion of refresher trainer | · On return to full duties to comply with current practices | · The employer to take necessary steps to remove your name form the register | · None of the settlement conditions to be recorded in the register. | You incurred legal expenses in relation to having your name removed from the register.