Edited version of your written advice

Authorisation Number: 1013063272332

Date of advice: 1 August 2016

Ruling

Subject: Income Tax: Deductions: Business and professional items: Specific deductions

Question 1

Is The Company allowed a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for advice from a legal practitioner regarding proposed penalties and upcoming court hearings about breaches, including actions which should be taken to ensure future compliance, of the Fair Work Act 2009 (Cth) (Fair Work Act) by The Company and its Managing Director?

Answer

Yes

This ruling applies for the following periods:

• 1 July 20XX to 30 June 20XX

• 1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1. The Company operates a business.

2. The Company has contravened various Australian workplace laws including provisions of the General Retail Industry Award 2010 and the Fair Work Act.

3. Fair Work Australia is currently reviewing The Company and its Managing Director with the view of issuing penalties (Proposed Penalties) under the Fair Work Act for breach of their industrial relations duties.

4. The Company incurred legal expenses from a legal practitioner regarding the Proposed Penalties, upcoming court hearings and corrective actions that The Company and its Managing Director should take to ensure future compliance with the Fair Work Act.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 8-1

Income Tax Assessment Act 1997, subsection 8-1(1)

Income Tax Assessment Act 1997, section 8-1(2)

Reasons for decision

Issue 1

Question 1

Subsection 8-1(1) of the ITAA 1997 allows deductions from assessable income for any loss or outgoing which is:

• incurred in gaining or producing your assessable income, or

• necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

Subsection 8-1(2) of the ITAA 1997 excludes deductions under subsection 8-1(1) of the ITAA 1997 if the loss or outgoing is:

• of a capital or of a capital nature,

• of a private or domestic nature,

• incurred in relation to gaining or producing exempt or non-assessable non-exempt income, or

• a provision of the ITAA 1997 prevents a deduction.

Paragraph 4 of Taxation ruling TR 2000/5 Income tax and fringe benefits tax: costs incurred in preparing and administering employment agreements states:

The following costs incurred by an employer are an allowable deduction [under section 8-1 of the ITAA 1997]:

• costs of drawing up employment agreements for existing employees and new employees of an existing business; and

• costs incurred in the settling of disputes arising out of existing employment agreements.

In your case, The Company has incurred legal costs associated with breaches of their obligations under the General Retail Industry Award 2010 and the Fair Work Act relating to the Proposed Penalties, upcoming court hearings and corrective actions (The Legal Advice). It is accepted that the nature of the expenditure on The Legal Advice is akin to settling a dispute arising out of an existing employment agreement as described in TR 2000/5 and as such would be an allowable deduction for The Company under section 8-1 of the ITAA 1997.

Further issues for you to consider

Section 26-5 of the ITAA 1997 specifically excludes a deduction under section 8-1 of the ITAA 1997 for penalties and fines, specifically the following amounts are not an allowable deduction:

• an amount(however described) payable, by way of penalty, under an Australian law or a foreign law, or

• an amount ordered by a court to be paid on the conviction of an entity for an offence against an Australian law or foreign law.

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