Private ruling: Deduction for legal expenses
Date of advice: 28 July 2017
Published: November 2017
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you entitled to a deduction for legal expenses? | A1: Yes. | Q2: Are you entitled to a deduction for the settlement sum you paid to settle the claim against you? | A2: Yes.


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 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. | Detailed Reasoning - Legal expenses: 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. FC 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. 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 income producing activities of the taxpayer ( The Herald and Weekly Times Ltd v. FC of T (1932) 48 CLR 113). The action out of which the legal expense arises has to have more than a peripheral connection to the taxpayer's business or income earning activities. The expense may arise out of litigation concerning the taxpayer's professional conduct ( Magna Alloys and Research Pty Ltd v. FC of T (1980) 11 ATR 276; 80 ATC 4542; Putnin v. FC of T (1991) 21 ATR 1245; 91 ATC 4097). When the principal reason for incurring the legal expenses is defending the actions of the taxpayer in carrying out their employment duties through which they gain or produce assessable income, such expenses are characterised as being of a revenue nature and are deductible ( Inglis v. FC of T 87 ATC 2037; and Case V116 88 ATC 737; AAT Case 4502 (1988) 19 ATR 3703). In your case the legal expenses have arisen out of a need to defend your actions in carrying out your income-producing employment activities, being your work as a medical professional. Therefore the expenses involved will be deductible. | Detailed Reasoning - Settlement: Generally, the treatment of a settlement sum or damages payment will follow the treatment of the other legal costs incurred in relation to a particular matter. As discussed above, your legal expenses have been treated as being related to your income-producing employment activities. Therefore the settlement sum you paid will be treated the same and will also be deductible.

Relevant facts: The arrangement that is the subject of the Ruling is described below. | You are employed as a medical professional. | You carried out a procedure on a patient which was unsuccessful. | This patient had remedial work done by another medical professional. | Legal proceedings were carried out against you for the loss and damage caused by this unsuccessful procedure. | You incurred legal expenses in defending this claim. | You settled the matter for a sum of money. | You paid these legal expenses yourself as your work did not provide insurance.