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Edited version of your written advice
Authorisation Number: 1012848692257
Date of advice: 27 July 2015
Ruling
Subject: Legal expenses
Question 1
Are you entitled to a deduction for legal expenses incurred in seeking advice regarding your employment rights?
Answer
Yes.
Question 2
Are you entitled to a deduction for legal expenses incurred in lodging an application to Fair Work Australia to deal with a General Protections Dispute against your former employer?
Answer
No.
This ruling applies for the following periods
Year ended 30 June 20XX
Year ended 30 June 20XX
The scheme commences on
1 July 20XX
Relevant facts and circumstances
A complaint against you was lodged with your employer by another employee. You sought legal advice as to your rights under your employment contract as you had concerns regarding how the complaint process was managed.
In an interview you were advised the allegation was not substantiated but the incident would remain open on your personnel file. At the same interview, you were informed your position had been made redundant due to a restructure. You were invited to apply for any of the newly created positions.
You sought legal advice regarding your rights under the redundancy particularly if you could be made redundant in this manner under your employment conditions.
You applied for the newly created positions but were unsuccessful. You were made redundant.
After being made redundant you sought legal advice and, as a result of that advice, you lodged an application for Fair Work Australia to deal with a General Protections Dispute against your employer.
The application sought a determination of whether your employer had breached the Fair Work Act 2009 through the process which resulted in you being made redundant.
If the determination was found in your favour you intended to seek reinstatement or financial compensation.
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.
The deductibility of legal expenses will be dependent upon the reasons the legal expenses were incurred and not the outcome of the action undertaken.
For legal expenses to constitute an allowable deduction it must be shown that they were incidental and relevant to the production of the taxpayer's assessable income (Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR47; (1949) 4 AITR 236; (1949) 8 ATD 431).
If the outcome sought by the legal action is revenue in nature then the legal expenses will also be revenue in nature. Similarly, if the advantage sought is capital in nature the expenses will also be capital in nature.
There are often occasions where the legal expenses are incurred in relation to proceedings that relate both to amounts that are income in nature as well as amounts which are not. In these situations, the expenses need to be apportioned between the income and non-income claims sought.
Legal advice - employment rights
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 action out of which the legal expense arises has to have more than a peripheral connection to the taxpayer's business and the expenses may arise out of litigation concerning the taxpayer's professional conduct.
Similarly, deductions are allowable for the costs in preparing and administering employment agreements. Taxation Ruling TR 2000/5 states that certain costs incurred by an employee are an allowable deduction, those costs being:
• costs of drawing up an employment agreement with an existing employer
• costs of settling disputes arising from an existing employment agreement
• costs of changing conditions of an existing employment agreement
• costs of renewing or extending a fixed term agreement where there is a provision allowing for renewal or extension
On the first occasion you sought legal advice, it was in relation to the process used to investigate a complaint against the manner in which you carried out your employment duties.
The second time you sought legal advice was in relation to your rights under your employment contract when you were offered a redundancy.
It is accepted that you incurred the legal expenses on these occasions in defending how you carried out your employment duties and in relation to existing rights under your employment agreement. Therefore you are entitled to a deduction for these legal expenses.
Legal advice - General protections dispute
Taxation Determination TD 93/29 which examines the deductibility of legal expenses in certain situations states
If the legal action goes beyond a claim for a revenue item such as wages and constitutes an action for breach of the contract of employment where the essential character of the advantage sought relates to an enduring advantage that is of a capital nature, the legal costs would not be deductible. For example, legal expense related to an action for damages for wrongful dismissal are not deductible.
You incurred costs in lodging a general protections dispute against your employer following your termination seeking a determination that your employer had breached your contract of employment. You intended to seek reinstatement or financial compensation if the breach was proven.
Reinstatement of employment would have provided you with a lasting benefit and is considered to be capital in nature. Similarly, any financial compensation awarded would be a capital amount as it would not have arisen from services rendered.
The advantages sought are considered to be capital in nature and as such the legal expenses you incurred are also capital in nature. Accordingly, you are not entitled to a deduction for these legal expenses.
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