ATO Interpretative Decision
ATO ID 2002/391
Income TaxLegal Expenses - recovery of unused annual leave and unused long service leave from ex-employer
FOI status: may be released
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Status of this decision: Decision Current
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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.
Is the taxpayer entitled to claim a deduction under 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the legal expenses they incurred in order to recover their unused annual leave and unused long service leave from their ex-employer?
Yes. The legal expenses directly relate to the gaining or producing assessable income and are deductible under section 8-1 of the ITAA 1997.
The taxpayer ceased employment with their employer.
The employer refused to pay the taxpayer amounts in respect of unused annual leave and unused long service leave.
The taxpayer took action through the Industrial Relations Commission. The taxpayer incurred legal costs in obtaining a judgement in respect of the unused annual leave and unused long service leave.
The Commission ordered the ex-employer to pay the taxpayer an amount representing the taxpayer's unused annual leave and unused long service leave.
Reasons for Decision
Section 8-1 of the ITAA 1997 states that you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing assessable income and is not:
- Capital, private or domestic in nature,
- Incurred in gaining or producing exempt income, or
- Prohibited by a section of the ITAA 1997 or the Income Tax Assessment Act 1936 (ITAA 1936).
Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the year. Salary and wages, including annual leave payments, is considered ordinary income as it is paid directly as a result of the personal services an employee renders for their employer.
However, unused annual leave and unused long service leave (although acquired through personal services and thus characterised as ordinary income) are considered to be forms of statutory income under section 6-10 of the ITAA 1997.
Section 73-10 of the ITAA 1997 provides concessional tax treatment for unused annual leave received as a lump sum. Section 83-30 of the ITAA 1997 provides concessional tax treatment for unused long service leave received as a lump sum. Although the tax treatment of these amounts is different from salary and wages (including payments in respect of leave taken) earned during the course of employment, it does not alter the character of the payments as ordinary income.
The legal expenses incurred by the taxpayer in order to obtain the unused annual leave and unused long service leave resulted in the taxpayer gaining assessable income. There is a clear connection between the assessable income and the expense. The expenses were not incurred in respect of income that was capital, private or domestic in nature.
Accordingly, the legal expenses were incurred in gaining the taxpayer's assessable income and are deductible under section 8-1 of the ITAA 1997.
|Date of Amendment||Part||Comment|
|27 March 2015||Reasons for Decision||Replace Section 26AC and Section 26 AD of the ITAA 1936 with Section 83-10 and Section 83-80 of the ITAA 1997.|
|Legislative References||Replace Section 26AC and Section 26 AD of the ITAA 1936 with Section 83-10 and Section 83-80 of the ITAA 1997.|