ATO Interpretative Decision

ATO ID 2002/692

Income Tax

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Issue

Is the taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for legal expenses incurred in defending a driving charge?

Decision

No. The taxpayer is not entitled to a deduction under section 8-1 of the ITAA 1997 for legal expenses incurred in defending a driving charge.

Facts

The taxpayer's employment duties required them to drive a motor vehicle.

In the course of their employment the taxpayer was involved in a car accident.

As a result of this accident the taxpayer was found guilty of a dangerous driving charge. The taxpayer appealed and was found not guilty.

In the course of defending the charge the taxpayer incurred legal expenses.

The taxpayer was of the view that if they had not been acquitted of the charge they would have lost their driver's licence and their job.

Reasons for Decision

Section 8-1 of the 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.

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] HCA 34; (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 private nature, then the expenses incurred in gaining the advantage will also be of a private nature.

The taxpayer used their car on a day to day basis in the course of their employment and the legal expenses incurred in defending the dangerous driving charge arose as a consequence of the taxpayer's employment activities. Whilst 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 or employment, the taxpayer's reason for defending the charge was to enable them to maintain their driver's licence (right to drive) and as a consequence, their job.

The right to drive on public roads does not cease to be a private right merely because the taxpayer is employed in some capacity which involves the use of the public road system (Taxation Determination TD 93/108).

Accordingly, legal expenses are of a private nature if they are incurred to protect a taxpayer's right to drive a car, even if their employment requires them to hold a driver's licence (Case P55 82 ATC 253; (1982) 25 CTBR (NS) Case 109 and Case Q99 83 ATC 491; (1983) 27 CTBR (NS) Case 27).

As the taxpayer incurred the legal expenses to enable them to maintain their driver's licence, the expenses are private in nature. Therefore, the legal expenses are not an allowable deduction under section 8-1 of the ITAA 1997.

Amendment History

Year of income:  Year ended 30 June 2001

Legislative References:
Income Tax Assessment Act 1997
   section 8-1

Case References:
Hallstroms Pty Ltd v. Federal Commissioner of Taxation
   (1946) 72 CLR 634
   [1946] HCA 34
   (1946) 3 AITR 436
   (1946) 8 ATD 190

Related Public Rulings (including Determinations)
Taxation Determination TD 93/108

Keywords
Deductions & expenses
Employees
Legal action
Legal expenses

Siebel/TDMS Reference Number:  DW383818; 1-6DHIBFC

Business Line:  Small Business/Individual Taxpayers

Date of publication:  3 July 2002

ISSN: 1445-2782