| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your written advice
Authorisation Number: 1051198238164
Date of advice: 2 March 2017
Ruling
Subject: The deductibility of legal expenses
Question and answer:
Are you entitled to a deduction for legal expenses?
Yes.
This ruling applies for the following period(s)
Year ended 30 June 20YY
Year ended 30 June 20ZZ
The scheme commences on
1 July 20XX
Relevant facts and circumstances
You were employed by the entity XYZ.
During your employment you were accused of an offence by another employee.
During the subsequent investigation into the incident you felt pressure to resign from your position.
After several meetings with you resigned from your position.
At a subsequent trial you were acquitted of all charges.
After your acquittal, you commenced legal proceedings seeking compensation from your former employer for wrongful dismissal.
The compensation that you were seeking is as follows:
● Forgone salary (calculated as the difference between the salary from your new employer and that from your former employer);
● Superannuation guarantee contributions that your former employer would have been required to include on the salary foregone; and
● The value of shares that would have been received under the bonus share plan conducted by your former employer.
Your actions against your former employer were unsuccessful.
In addition to incurring legal expenses, you were ordered to pay legal costs for the 'Defendant' as a result of your unsuccessful legal proceedings.
You have provided documents from the court proceedings that will be read with this ruling.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Section 8-1 of the 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.
For legal expenses to constitute an allowable deduction, it must be shown that they are incidental or relevant to the production of the taxpayer's assessable income or business operations. Also, 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 that 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. It follows also that the character of legal expenses is not determined by the success or failure of the legal action.
Tax Determination TD 93/29 Income tax: if an employee incurs legal expenses recovering wages paid by a dishonoured cheque, are these legal expenses an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997?, provides the Commissioner view on the deductibility of legal expenses incurred by an employee in recovering unpaid wages.
In responding to the question of whether legal expenses incurred in recovering wages are a deductible expense, paragraph 1 of Tax Determination TD 93/29 states:
1. Yes, providing that the legal action relates solely to the recovery of wages. This is because in deciding '... whether expenditure has the character of a capital or of a revenue payment ... the advantage for which the expenditure was incurred must be identified and the manner in which it "is to be relied upon or enjoyed" must be considered ...'. ( Magna Alloys and Research Pty. Ltd. v. FC of T 80 ATC 4542 at 4548; 11 ATR 276 at 283).
Therefore consistent with the principles established in TD 93/29, for legal expenses to be a deductible expense they must be incurred for the purpose of pursuing salary and wages and other remuneration.
Your circumstances
In your circumstances, you commenced legal proceedings against your former employer. The advantage that you sought in undertaking these proceeding was compensation for lost wages, compulsory superannuation payments and the value of shares that would have been received under a bonus share plan. As all these items are revenue items, the legal expenses incurred in pursuit of these items are deductible expenses.
Accordingly, you are entitled to a deduction for the legal expenses that you have incurred as the Plaintiff, in addition to those that you were ordered to pay the Defendant under section 8-1 of the ITAA 1997.
Copyright notice
© Australian Taxation Office for the Commonwealth of Australia
You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).
