Edited version of your private ruling

Authorisation Number: 1012028772212

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Ruling

Subject: legal expenses

Question 1

Are you entitled to a deduction for expenses incurred in relation to your application to deal with a general protections dispute under the Fair Work Act 2009?

Answer

Yes.

Question 2

Are you entitled to a deduction for legal expenses incurred in relation to your loss of wages?

Answer

Yes.

Question 3

Are you entitled to a deduction for legal expenses incurred in relation to your medical expenses and compensation for pain, suffering, hurt, humiliation and stress?

Answer

No.

Question 4

Are you entitled to a deduction for legal expenses incurred in relation to the imposition of a penalty on your employer?

Answer

No.

Question 5

Are you entitled to a deduction for expenses incurred in relation to providing statements and materials in support of your employment conditions and loss of wages?

Answer

Yes.

Question 6

Are you entitled to a deduction for expenses incurred in relation to providing statements and materials in support of your medical condition and non-economic losses?

Answer

No.

Question 7

Are you entitled to a deduction for legal expenses incurred in seeking interest on compensation for loss of wages and other assessable income?

Answer

Yes.

Question 8

Are you entitled to a deduction for legal expenses incurred in seeking interest on compensation for medical expenses and other non-assessable income?

Answer

No.

This ruling applies for the following periods

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced on

1 July 2010

Relevant facts

The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

o the application for private ruling,

o application to deal with a general protections dispute under the Fair Work Act 2009, and

o Federal Magistrates Court application and claim.

You are an employee.

You have been employed with this employer for more than ten years.

You advised that the poor management and people skills of the Chief Executive Officer (CEO) made your work difficult.

Following an incident with the CEO, you left work, sought medical treatment and was provided with a WorkCover Certificate which certified you unfit for work due to anxiety caused by months of work place stress.

You allege that this condition arose because the CEO bullied and harassed you and because the CEO bullied and harassed others in your presence.

You advise that your employer's bullying and harassment policy as well as the staff complaints and disputes policy have not been followed.

You have not been able to return to work for more than 12 months because of medical conditions arising from the alleged bullying and harassment of you and other employees and your employer's failure to properly investigate your complaints.

You provided statements to investigate your claim for worker's compensation.

You were paid worker's compensation for a few months.

At a time you were certified fit for suitable duties provided you had no contact with the CEO.

You wrote to your employer's directors asking them to take action to instigate an independent investigation into the complaints of bullying and harassment by the CEO with a view to resolving them and enable you to return to a safe working environment.

A letter from the workers compensation insurer advised you that liability to your claim for workers compensation was disputed on the bases that

o you were not bullied or harassed as alleged;

o you did not suffer a psychological/psychiatric injury in the meaning of the Workers Compensation Act 1987;

o your employment was not a substantial contributing factor to your alleged injury within the meaning of the Workers Compensation Act 1987; and

o if you suffered a psychological/psychiatric injury as alleged, the injury was wholly or predominantly caused by reasonable action taken by your employer.

A letter to you from your employer's board of directors gave you time to submit further material, comments or submissions that you wished the board to consider.

You then engaged solicitors to act for you in relation to this matter.

You obtained additional witness statements and materials to submit to the board. You obtained statements from four previous employees. None of these persons have been contacted by your employer about their allegations.

Other previous employees also wrote letters with details of bullying and harassment by the CEO.

Several people left their employment. You believe that the CEO's bullying harassing management style was a factor if not the sole reason for the employees leaving.

Your employer's board subsequently wrote to you and advised that the allegations have not been substantiated and that they should be and are rejected.

For a few months you relied on using your accrued leave entitlements. Your employer advised you that your annual leave entitlements did not continue to accrue while you were receiving workers compensation.

You have not been paid by your employer for a few months.

In late 2011 you lodged an application to the Federal Court seeking compensation and pecuniary penalty.

You claimed the following compensation:

· loss of wages,

· medical expenses,

· travel expenses for medical appointments,

· legal expenses to provide statements and materials in support of complaints,

· non-economic loss for pain, suffering, hurt, humiliation and stress,

· continuing loss of wages, medical and travel expenses, and

· interest on compensation.

You also sought a pecuniary penalty to be paid by your employer.

You are still employed by this employer.

You took action to seek a safe workplace and to resume earning assessable income.

You took action against your employer to have them properly investigate and resolve your complaints of alleged bullying and harassment of you and other employees by the CEO.

You incurred expenses in:

· obtaining and providing evidence in support of your complaint,

· making application to Fair Work Australia to deal with a general protections dispute, and

· making application to the Federal Magistrates Court claiming, inter alia, compensation for loss of salary, and

· medical treatment.

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.

A number of significant court decisions have determined that for an expense to be an allowable deduction:

· it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. FC of T; (1958) 100 CLR 478 (Lunney's case)), 

· there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. FC of T, (1949) 78 CLR 47), and

· it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore Co (WA) Pty Ltd v. FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).

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.

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

In FC of T v. Rowe (1995) 31 ATR 392; 95 ATC 4691, the taxpayer, an employee, was suspended from normal duties and was required to show cause why he should not be dismissed after several complaints were made against him. A statutory inquiry subsequently cleared him of any charges of misconduct or neglect. The court accepted that the legal expenses incurred by the taxpayer in defending the manner in which he performed his duties, in order to defend the threat of dismissal, were allowable. Since the inquiry was concerned with the day to day aspects of the taxpayer's employment, it was concluded that his costs of representation before the inquiry were incurred by him in gaining assessable income.

Application under the Fair Work Act 2009

Taxation Ruling TR 2000/5 states that expenses incurred by an employee to settle a dispute with their current employer over their employment conditions are incurred in earning assessable income and are therefore generally deductible.

In Inglis v. FC of T 87 ATC 2037; and Case V116 88 ATC 737; AAT Case 4502 (1988) 19 ATR 3703, an employee incurred legal expense in defending additional conditions and controls their employer imposed on their employment duties. The Deputy President accepted that these expenses were incidental and relevant to the work which produced their assessable income and were not excluded from deduction as private or domestic expenditure.

In your situation, it is accepted that the conditions you experienced in your workplace impacted on your ability to carry out your day to day employment duties. The dispute concerned your employment conditions and the implementation of the Bullying and Harassment Policy as well as the Staff Complaints and Disputes Policy. You incurred expenses in respect of actions to cease the bullying and harassment.

It is considered that the disputes in the above matters while remaining an employee are sufficiently connected to your income earning activities and are not capital or private in nature. While you were not directly defending the way in which you performed your duties, you were seeking to restore the conditions and safe environment of your workplace. It is accepted that the expenses are incidental and relevant to the gaining of your assessable income.

Consequently, you are entitled to a deduction for your application fee and associated expenses of your Fair Work Act 2009 application under section 8-1 of the ITAA 1997.

Loss of wages

Legal expenses incurred in recovering salary or wages are considered to be of a revenue nature and therefore deductible under section 8-1 of the ITAA 1997.

In your case you incurred legal expenses in relation to unpaid wages. The associated legal expenses in relation to your unpaid wages relates sufficiently to the earning of your assessable income and are therefore deductible under section 8-1 of the ITAA 1997.

Medical expenses, travel to medical appointments, compensation for pain, suffering, hurt, humiliation and stress

Medical expenses are generally regarded as private expenses. Additionally it is a long standing principle that a taxpayer does not satisfy section 8-1 of the ITAA 1997 merely by demonstrating some casual connection between the expenditure and the derivation of income. What must be shown is a closer and more immediate connection. The expenditure must be incurred in gaining or producing your assessable income (Lunney's case). These principles have been affirmed by the High Court in Commissioner of Taxation v Payne [2001] HCA 3.

The deductibility of the expenses can also depend on whether the claims would have resulted in assessable income. Reimbursement of medical expenses or a payment for personal injury is not generally regarded as assessable income.

It is acknowledged that your work conditions impacted your health. However, the legal expenses incurred in relation to your medical costs, pain, suffering, hurt, humiliation and stress and travel expenses to your medical appointments do not have the required nexus with the derivation of assessable income and are of a private nature. Therefore, the associated legal expenses are not an allowable deduction under section 8-1 of the ITAA 1997.

Imposition of a penalty

You are seeking an imposition of a pecuniary penalty for your employer in relation to the bullying and harassment in the workplace.

The imposition of a penalty on your employer does not relate sufficiently to the earning of your assessable income. Consequently no deduction is allowable under section 8-1 of the ITAA 1997 for the legal expenses incurred in relation to this matter.

Expenses in providing statements and materials in support of complaints

Where expenses are incurred in relation to obtaining statements and materials regarding your work environment and the loss of your wages, it is considered that these expenses are sufficiently related to your assessable income and are therefore deductible. However, for expenses incurred in obtaining statements and materials to support your medical conditions and pain and suffering and other non-economic losses, no deduction is allowable as they do not relate to your assessable income.

Interest on compensation

Interest payments on a judgment debt relating to personal injury are exempt from income tax under section 51-57 of the ITAA 1997.

In your case, any interest paid on compensation for pain and suffering, medical expenses and other non-assessable payments is not regarded as assessable income. It follows that any legal expenses incurred in relation to such payments are not an allowable deduction.

However legal expenses incurred in relation to interest on loss of wages and other assessable income is an allowable deduction.

Apportionment of expenses

As your legal expenses are not fully deductible, you will need to apportion the expenses using a reasonable basis. Apportionment is a question of fact and involves a determination of the proportion of the expenditure that is attributable to deductible purposes. The Commissioner believes that the method of apportionment must be fair and reasonable in all the circumstances.

Where legal expenses are not broken up into the relevant parts by your solicitor, you will need to calculate the deductible portion. One way to apportion your expenses is according to the dollar value of the assessable amount as compared to the total amount being sought. The relevant percentage that relates to your assessable income can then be applied to the legal expenses incurred.