Suing the boss is tax deductible

Employees who take legal action against their employers to protect their jobs can claim their legal costs as a tax deduction, the Federal Court of Appeal has found.

The case involves a Federal Government customs officer who was prosecuted for illegally using his position to obtain information about a search warrant, charges that if successful would have cost him his job.

He successfully defeated the charges, but then faced further court action when the Australian Taxation Office rejected his attempts to claim his legal costs as a tax deduction.

The tax office won the initial hearing on the ground that the actions by the customs officer that resulted in the charges were not undertaken for the purpose of producing income because they were outside the scope of his job.

But the Federal Court of Appeal rejected this view, finding that if the purpose of the legal defence was to protect income – in this case, income that would be lost if the customs officer was sacked – then associated costs are tax deductible, even if the conduct that triggered the action was not directly related to an income producing activity.

The decision means that employees will be better able to access tax deductions for costs associated with legal action connected with their employment.

“The case shows that although activities specifically engaged in might, on a narrow view, be considered outside the scope of employment, one has to look at the purpose for undertaking the expenditure,” Arnold Bloch Liebler senior partner Mark Liebler told The Australian Financial Review.

The tax office is considering whether it will appeal the decision.