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This edited version has been archived due to the length of time since original publication.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: 1051355884566

Date of advice: 28 March 2018

Ruling

Subject: Legal expenses for workplace bullying and harassment matters

Question

Are you entitled to a deduction for the legal expenses incurred in relation to the lodgment of a workplace complaint about bullying and harassment and the lodgment of a workers compensation claim?

Answer

Yes

Question

Are you entitled to a deduction for legal expenses incurred in relation to the preparation and lodgment of an order to stop bullying through the Fair Work Commission, in respect of events that occurred while you were an employee?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You were employed as a full time employee with your employer.

During your employment a number of incidents from your manager and other staff led you to feeling bullied and harassed. Your health was also affected.

In 20XX you obtained professional legal advice and assistance to lodge a complaint regarding the bullying and harassment with your employer.

You incurred costs for the legal services provided. These services involved consultations about, drafting and reviewing the bullying and harassment complaint letters to your employer.

You took paid sick leave from work and were diagnosed with generalised anxiety disorder.

In 20XX you obtained professional legal advice and assistance in lodging a worker’s compensation claim.

You incurred costs for the legal services. These services included continuation of work on the complaint regarding the bullying and harassment lodged with your employer, the lodgment of a worker’s compensation claim, and advice about taking on a second job whilst on unpaid leave from your employment.

You were on unpaid sick leave for a number of months.

You were certified as not fit for pre-injury duties from Workcover. However you were later certified as available to return to work on suitable duties in accordance with your medical certification.

You started secondary casual employment with a new employer in order to meet your financial obligations after being on unpaid leave. You advised your employer of this and again requested a return to work, performing suitable duties or further approval of unpaid leave.

Your Employer advised that you would not be permitted to return to work until you were medically cleared to return to your position, that further unpaid leave would not be approved without formal application and your access was removed in response to your undertaking secondary employment without first gaining approval from your employer.

In March 20XX another law firm began performing legal services for you. The scope of works agreed to with them includes have been described in this ruling.

You incurred costs for the legal services provided. These services included the preparation and lodgment of an application for an order to stop bullying with the Fair Work and other activities intended to facilitate your return to work with your employer.

Your employer’s insurers accepted liability for your psychological injury that happened at work. They advised you would receive weekly benefits based on pre-injury average weekly earnings, current earnings and deductibles.

Your Application for Stop Bullying Orders was discontinued and the law firm ceased receiving instructions from you in 20XX.

You resigned from your employment in 20XX.

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 a loss or outgoing to the extent that it is incurred in gaining or producing assessable income, except where it is of a capital, private or domestic nature.

Therefore, in determining whether a deduction is allowable under section 8-1 of the ITAA 1997, the nature of the expense must be considered.

The nature or character of legal expenses follows the advantage that is sought to be gained by incurring the expenses (Hallstroms Pty Ltd v. FC of T (1946) 72 CLR 634; (1946) 8 ATD 190). 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.

Legal expenses are generally deductible if they arise out of the day to day income producing activities of the taxpayer (Herald and Weekly Times Ltd v. Federal Commissioner of Taxation (1932) 48 CLR 113; (1932) 39 ALR 46; (1932) 2 ATD 169). The legal action must have more than a peripheral connection to the taxpayer's income producing activities (Magna Alloys and Research Pty Ltd v. FC of T (1980) 49 FLR 183; (1980) 11 ATR 276; 80 ATC 4542).

In FC of T v. Rowe (1995) 60 FCR 99; (1995) 31 ATR 392; 95 ATC 4691, the court accepted that legal expenses incurred in defending the manner in which a taxpayer performed his employment duties were allowable. No significance was placed by the court on the taxpayer's status as an employee.

Question 1

In your case, you allege that you were subjected to bullying and harassment in the work place.

You sought legal advice in relation to:

Although you were not directly defending the manner in which you performed your duties, you were seeking advice regarding a safe environment to carry out those duties.

As the legal expenses were incurred to enable you to carry out your employment duties, there is more than just a peripheral connection to your income producing activities. You are therefore entitled to a deduction under section 8-1 of the ITAA 1997 for the legal expenses incurred.

Question 2

In your case, you allege that you were subjected to bullying and harassment in the work place.

You sought legal advice in relation to drafting, filing and prosecuting an application for an order to stop bullying with the Fair Work Commission, in order to facilitate your return to work.

Although you were not directly defending the manner in which you performed your duties, the dispute concerned your employment conditions and it is considered you were seeking a safe environment to carry out those duties.

As the legal expenses were incurred to enable you to carry out your employment duties, it is considered there is more than just a peripheral connection to your income producing activities. You are therefore entitled to a deduction under section 8-1 of the ITAA 1997 for the legal expenses incurred.

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).