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Ruling
Subject: Legal expenses
Question
Are you entitled to a deduction for legal expenses incurred in seeking payment of an allowance?
Answer
Yes
This ruling applies for the following periods
Year ended 30 June 2011
Year ended 30 June 2012
The scheme commenced on
1 July 2010
Relevant facts and circumstances
You were not paid an allowance provided by your Award by your employer.
You commenced legal action against your employer in an attempt to obtain the allowance.
You and your employer signed a Deed of Release to settle the proceedings.
Under the Deed of Release your employer agreed to pay you the allowance.
The allowance forms part of your taxable income.
You incurred legal expenses in undertaking the legal action.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1.
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 (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 allowable 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; (1946) 8 ATD 190). The nature or character of the legal expenses follows the advantage which is sought to be gained by incurring the expenses.
If the advantage to be gained is of a capital nature then the expenses incurred in gaining the advantage will also be of a capital nature.
The legal expenses incurred were incurred by you were to obtain payment of the allowance. As the allowance forms part of your taxable income it is therefore revenue in nature and not a capital receipt. There is a clear connection between your assessable income and the expense.
Accordingly, the legal expenses were incurred in gaining your assessable income and are deductible under section 8-1 of the ITAA 1997.
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