ATO Interpretative Decision
ATO ID 2002/66
Income Tax
Deductions & expenses: Legal fees incurred in defending a claim of harassment and victimisationFOI status: may be released
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This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Are legal fees incurred in defending a sexual harassment charge deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No, legal fees incurred in defending a sexual harassment charge are not deductible under section 8-1 of the ITAA 1997 as they are expenses of a capital or private nature.
Facts
The taxpayer is an employee. The duties of the taxpayer do not include advising other employees on the performance of their work.
Another employee lodged a complaint of sexual harassment and victimisation against the taxpayer with the relevant Government Authority.
The taxpayer denied the allegations and in defending the charge engaged a solicitor for which they paid certain costs.
The matter proceeded to the relevant Government Authority where it was resolved through a conciliation agreement.
Reasons for Decision
Section 8-1 of the ITAA 1997 states that a you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income and excludes losses or outgoings of a capital, private or domestic nature.
For legal expenses to constitute an allowable deduction, it must be shown that they were incidental or relevant to the production of the taxpayer's assessable income, Ronpibon Tin NL v. FC of T (1949) 78 CLR 47; 8 ATD 431; 4 AITR 236.
Also, 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; 8 ATD 190), as the nature or character of the legal expenses follows the nature of the associated payment.
Thus, legal expenses must arise from a taxpayer's day to day performance by which he or she derives their assessable income (The Herald and Weekly Times Ltd v. FC of T (1932-33) 48 CLR 113; (1932) 39 ALR 46; 2 ATD 169; Inglis v. FCT 87 ATC 2037; Case V116 88 ATC 737; AAT Case 4502 (1988) 19 ATR 3703).
Furthermore, the legal expenses must have arisen from the duties that the taxpayer performs to derive his or her assessable income (FC of T v. Rowe (1995) (1995) 131 ALR 622; 95 ATC 4691; 31 ATR 392).
The legal expenses incurred by the taxpayer defending the sexual harassment and victimisation claim made by another employee did not arise from the performance of the taxpayer's duties from which they derived assessable income. This decision is supported in Case U102, 87 ATC 621; AAT Case 5376 (1989) 20 ATR 4001; Case W94 89 ATR 792; AAT Case 5376 (1989) 20 ATR 4001.
Thus, the expense incurred by the taxpayer is of a capital or private nature and is not an allowable deduction.
Date of decision: 17 December 2001Year of income: Year ended 30 June 2001
Legislative References:
Income Tax Assessment Act 1997
section 8-1
Case References:
Federal Commissioner of v. Rowe
131 ALR 622
95 ATC 4691
31 ATR 392
72 CLR 634
(1946) 3 AITR 436
8 ATD 190 Herald and Weekly Times v. Federal Commissioner of Taxation
(1932-33) 48 CLR 113
39 ALR 46
2 ATD 169 Inglis & Federal Commissioner of Taxation
87 ATC 2037 Ronpibon Tin NL v. FC of T
78 CLR 47
8 ATD 431
(1949) 4 AITR 236 Case U102
87 ATC 621 Case V116
88 ATC 737 AAT Case 4502
19 ATR 703 Case W94
89 ATC 792 AAT Case 5376
20 ATR 4001
Keywords
Negotiated settlements
Deductions & expenses
Legal expenses
ISSN: 1445-2782
| Date: | Version: | |
| You are here | 17 December 2001 | Original statement |
| 25 June 2002 | Archived |