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Edited version of your private ruling
Authorisation Number: 1012517482552
Ruling
Subject: The deductibility of legal expenses
Question 1
Are you entitled to a deduction for legal expenses incurred relating to the recovery of unpaid leave entitlements from an employer?
Advice/Answers:
Yes.
Question 2
Are you entitled to a deduction for legal expenses incurred relating to a random audit from a Government regulatory body?
Advice/Answers:
Yes.
This ruling applies for the following periods:
Year ended 30 June 2013
The scheme commences on:
1 July 2012
Relevant facts and circumstances
After termination of your employment you engaged the services of a solicitor to recover unpaid leave entitlements.
You settled out of court and received a lump sum payment greater than your leave entitlements.
You signed a non-disclosure statement, which did not contain a breakup of the amount received.
You incurred legal costs from the solicitor's services.
You were also the subjected of a random audit from a Government regulatory body regarding everyday work practices with a previous employer.
You were asked questions regarding your work and some of your previous clients, and because of professional confidentiality rules you didn't know how to respond. You received legal advice on the issue and incurred further legal costs.
You were employed in the same industry but under a different employer at the time of the audit.
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) provides that a loss or an outgoing is an allowable deduction if it is incurred in producing assessable income or in carrying on a business for the production of assessable income, unless that loss or outgoing is capital or of a private or domestic nature.
In determining whether a deduction for legal and other expenses is allowed 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). The nature or character of the expenses follows the advantage which 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.
Recovery of unpaid leave entitlements
You have incurred legal expenses in relation to the recovery of unpaid leave entitlements. These amounts are revenue in nature as they are considered to fall within the meaning of ordinary income.
There is a clear connection between the expenses you have incurred and the advantage sought in the form of the assessable income you have derived. Therefore you are entitled to a deduction for the expenses incurred to derive this income.
Legal advice for audit
You have incurred expenses for legal services employed to assist you with a government audit on your everyday work processes.
The advantage sought relates to the derivation of your assessable income and is therefore revenue in nature. As such you are entitled to a deduction for the legal expenses incurred for this purpose.