Edited version of private ruling

Authorisation Number: 1011631227050

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Ruling

Subject: Legal expenses

Questions and answers:

1. Are you entitled to a deduction for legal fees in relation to pursuing commission payments from your former employer?

Yes.

2. Are you entitled to a deduction for legal fees in pursuing your former employer for super guarantee?

No.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commenced on:

1 July 2009

Relevant facts

You have incurred legal expenses in receiving your entitlements to commissions and super guarantee contributions.

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 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.

The courts have considered the meaning of 'incurred in gaining or producing the assessable income'. In Ronpibon Tin N.L.Tongkah Compound N.L. v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236 the High Court stated that:

For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The words "incurred in gaining or producing assessable income" mean in the course of gaining or producing such income.

The expenditure must therefore be related to the production of assessable income.

Legal expenses

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) 8 ATD 190; (1946) 3 AITR 436). The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses (Magna Alloys & Research Pty Ltd v. FC of T 80 ATC 4542 at 4548; (1980) 11 ATR 276 at 283).

Further guidance is also provided in Taxation Determination TD 93/29 which states that where legal expenses are incurred in pursuing an amount of assessable income which is owed; those legal expenses are directly incurred in the process of deriving assessable income. 

In your case, you pursued a claim against your former employer for unpaid salary and wages owed to you. These amounts are assessable income and therefore the legal fees incurred to have them paid to you are deductable.

Superannuation

Superannuation is a way of saving money for your retirement. Employers must pay super into a complying super fund or retirement saving account for their eligible employees. These payments are called super guarantee payments or employer contributions.

Employer contributions do not form part of your assessable income. They are paid as a requirement of the Superannuation Guarantee (Administration) Act 1992. Although you may have suffered a loss as a result of the non payment of these contributions the loss cannot be said to be a loss or outgoing incurred in order to earn assessable income. Assessable income is income that is subject to income tax. The amount of your assessable income is not affected by the non payment of superannuation employer contributions.

In your case, you took legal action to recover unpaid superannuation payments. As the superannuation payments are not considered part of your assessable income it cannot be said that the legal expenses were incurred in the process of deriving assessable income. As such you are not entitled to a deduction under section 8-1 of the ITAA 1997 for legal expenses.

The apportionment of legal expenses is dealt with in Taxation Determination TD 93/29. This determination states that where legal expenses are incurred in relation to proceedings that relate both to amounts that are revenue in nature as well as amounts which are capital in nature, there must be some fair and reasonable assessment of the extent of the relation of the outlay to assessable income.

Taxation Determination TD 93/29 states:

Where the solicitors account is itemised, one reasonable basis for apportionment would be the time spent involving the revenue claim, relative to the time spent on the capital claim.  If the solicitors account is not itemised, a possible basis for apportionment would be either a reasonable costing of the work undertaken by the solicitor in relation to the revenue claim, or, where this is not possible, an apportionment on the basis of the monetary value of the revenue claim relative to the capital claim.

Therefore, the proportion of legal expenses incurred in pursuing salary and wages is deductible. However, the proportion of the legal expenses relating to pursuing the superannuation is not deductible under section 8-1 of the ITAA 1997.