Edited version of private advice

Authorisation Number: 1052102285229

Date of advice: 5 April 2023

Ruling

Subject: Deductions - legal expenses

Question

Are your legal expenses incurred in pursuing the non-payment of wages and entitlements deductible in accordance with section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Wages are assessable income. The legal expenses you incurred in recovering your unpaid wages relate directly to you earning your assessable income and are therefore a deductible expense.

This ruling applies for the following period:

Year ended DD MM YYYY.

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

You began employment with the employer on DD MM YYYY.

Your employer did not pay you any amount from DD MM YYYY until DD MM YYYY.

Your solicitors sent a letter of demand to the employer on DD MM YYYY claiming payment of wages, accrued annual leave entitlements and superannuation payments dating back to when you commenced employment with the employer.

You entered into a deed of settlement in resolution of the dispute with the employer on DD MM YYYY. Under the deed of settlement, the employer agreed to pay you sums representing wages owed for the 20YY/YY, 20YY/YY, 20YY/YY, 20YY/YY and 20YY/YY financial years.

On DD MM YYYY, you received payment for wages for the 20YY/YY, 20YY/YY, 20YY/YY and 20YY/YY financial years. You also received payment during the 20YY/YY financial year for wages for the 20YY/YY financial year.

You incurred legal expenses of $X in the 20YY/YY financial year pursing the employer for unpaid wages and entitlements.

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 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.

For legal expenses to constitute an allowable deduction, it must be shown that they are incidental or relevant to the production of 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] HCA 34. 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.

In 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? the Commissioner states that legal expenses incurred by an employee in recovering unpaid wages are deductible under section 8-1 of the ITAA 1997, as the expenses are directly incurred in the process of deriving assessable income.

You incurred legal expenses to recover unpaid wages. Salary and wages are assessable income. Therefore, the associated legal expenses you incurred in recovering unpaid wage payments relates sufficiently to the earning of your assessable income and are therefore deductible under section 8-1 of the ITAA 1997.

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