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Ruling
Subject: Deduction for the legal expenses
Question
Are you entitled to a deduction for the legal expenses you incurred?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2012
The scheme commenced on
1 July 2011
Relevant facts and circumstances
You were employed.
Your employment contract contained a clause dealing with an additional reward that would be payable to you for your work under certain circumstances.
The required circumstances took place but you were not paid the additional reward.
You incurred legal expenses in an attempt to collect the reward as outlined in your employment contract.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Summary
Your legal expenses were incurred in order to obtain a revenue amount. Therefore, it is considered that the expenses were incurred in order to gain assessable income and are not capital in nature. Consequently, you are entitled to a deduction for the legal expenses you have incurred.
Detailed reasoning
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.
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. 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 your case, you incurred legal expenses to recover a reward from your previous employer. It was clearly stated in your employment contract that an additional reward would be payable to you for your work under certain circumstances. The required circumstances took place but you were not paid the additional reward.
The reward you sought was part of the remuneration you were to receive for the work you undertook in your employment. The reward would be a revenue amount that formed part of your assessable income. Therefore, the advantage sought was not of a capital nature.
Your legal expenses are deductible as they were incurred in order to gain assessable income and they are not capital in nature.