Edited version of your written advice

Authorisation Number: 1012673082661

Ruling

Subject: Legal expenses

Question 1

Are you entitled to a deduction for legal expenses?

Answer

Yes.

Question 2

Can you claim a deduction for legal expenses in a year prior to when the expense was invoiced to you?

Answer

No.

Question 3

Where you have no income and you have deductible legal expenses, can you carry forward any loss?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts

You incurred legal expenses in an attempt to recover underpaid wages.

You reached an out of court settlement in the relevant financial year.

You have not worked since leaving your employment in 20XX.

Your legal expenses were invoiced to you in the relevant financial years.

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 person to claim a loss or outgoing that is incurred in gaining or producing assessable income so long as the loss or outgoing is not of a capital, private or domestic nature.

In determining whether a deduction for legal 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, (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.

You incurred legal expenses in order to recover underpaid wages. You reached an out of court settlement. Accordingly, you are entitled to a deduction for legal expenses.

Timing for deduction

Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of incurred - timing of deductions sets out the Commissioner's views on the meaning of incurred under section 51(1) of the Income Tax Assessment Act 1936 (replaced by section 8-1 of the ITAA 1997).

To claim a deduction, an expense must be incurred by the taxpayer in the course of gaining or producing their assessable income.

There is no statutory meaning of 'incurred'.

Generally, you incur an expense at the time you owe a present money debt that you cannot escape.

The courts have developed a set of rules that help to determine if an expense has been incurred.

• there must be a presently existing liability to pay a pecuniary sum;

• the taxpayer's liability may be defeasible by others;

• the liability must be a sum certain or capable of reasonable estimation;

• presently existing liability is determined on the circumstances of the case;

• an expense is incurred when actually paid if there was no presently existing liability.

To claim an expense as a deduction in a particular income year, it must have been incurred in that income year.

Therefore, your legal expenses may be claimed as a deduction in the financial year they were invoiced to you.

Losses

You generally make a tax loss when the total deductions you can claim for an income year exceed your assessable and net exempt income for the year.

Individuals can generally carry forward a tax loss indefinitely, but must utilise a tax loss at the first opportunity.

In your case, legal expenses incurred in the relevant financial year will create a loss for you as you did not have any assessable income in that year. Therefore, you can carry forward the loss until the next opportunity to claim.