Edited version of private ruling

Authorisation Number: 1011699210859

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Ruling

Subject: Work related legal expenses

Question

Are you entitled to a deduction for legal expenses?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2010

Year ending 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts

You are employed at a Clinic.

In October you and another employee were attending your patients in the common area.

The other employee left the common area for a short break leaving their patient unattended.

During their absence an aggressive physical fight broke out between the two patients.

As part of your duty of being an employee, you broke up the fight by restraining one of the patients.

Subsequently a complaint was lodged against you relating to the manner in which you separated the fight.

In November you received a notification advising you not to return to work and you then commenced extended leave.

In March of the following year you were charged with an offence.

You consulted a lawyer and have incurred legal expenses as a result.

The complaints lodged against you found to be false and the charges were dropped.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 allows a deduction for a loss or an outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is 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 your assessable income. Also, in determining whether a deduction for legal expenses is allowable, the nature of the expenditure must be considered. The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses.

In FC of T v. Rowe (1995) 31 ATR 392; 95 ATC 4691, the taxpayer, an employee, was suspended from normal duties and was required to show cause why he should not be dismissed after several complaints were made against him. A statutory inquiry subsequently cleared him of any charges of misconduct or neglect. The court accepted that the legal expenses incurred by the taxpayer in defending the manner in which he performed his duties were allowable. The activities which produced the taxpayer's income were what exposed him to the liability against which he was defending himself. Since the inquiry was concerned with the day to day aspects of the taxpayer's employment, it was concluded that his costs of representation before the inquiry were incurred by him in gaining assessable income.

In your case, it is accepted that you were required to defend the way in which you discharged your employment duties. Consequently you are entitled to a deduction for legal expenses relating to this defence.

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