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

Ruling: Q1: Are you entitled to a deduction for legal expenses you incurred to remove a restriction from your employment related licence? | A1: No.

Relevant facts and circumstances: You are an employee who operates machinery as part of your duties. Your machinery licence contains a restriction which prevents you from operating machinery above a certain weight or size. Your employer is currently purchasing larger machinery which you cannot operate due to the restriction. Once trained on the new machinery, you would be able to use them in a restricted capacity. You have engaged lawyers to have the restrictions removed from your licence. If the restrictions are removed you will be able to fully operate the new machinery which is expected to result in a pay rise.

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. For legal expenses to constitute an allowable deduction, it must be shown that they were incidental and 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; (1949) 4 AITR 236; (1949) 8 ATD 431). The nature of the expenditure must also be considered ( Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 8 ATD 190). The nature or character of the legal expense 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 expense incurred in gaining the advantage will also be of a capital nature. If the legal expenses arose out of the day to day income earning activities of the taxpayer they are considered to be revenue in nature and deductible under section 8-1 of the ITAA 1997. The action out of which the legal expenses arose has to have more than a peripheral connection to the taxpayer's current income earning activities. In your case, the ultimate advantage you are seeking is the removal of a restriction on your employment related licence which will allow you to operate larger machinery. The advantage you are seeking will provide you with a lasting benefit, that of being able to fully operate larger machinery, and is considered to be capital in nature. The legal expenses have not arisen from how you carry out your day to income earning activities. Additionally, expenses in respect of a medical condition are inherently private in nature and a challenge to a finding of your medical condition would also be considered private. As such, the legal expenses are not an allowable deduction under section 8-1 of the ITAA 1997.

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