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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?

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.

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.

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.

Date of Amendment Part Comment 27 February 2015 Reasons for Decision Amend for clarity Insert medium neutral citation: [1946] HCA 34 Case References Insert medium neutral citation: [1946] HCA 34

Date of Amendment | Part | Comment

27 February 2015 | Reasons for Decision | Amend for clarity Insert medium neutral citation: [1946] HCA 34

Case References | Insert medium neutral citation: [1946] HCA 34