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Edited version of your written advice
Authorisation Number: 1012717725896
Ruling
Subject: Legal expenses
Question
Are you entitled to a deduction for your legal expenses incurred?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2014
The scheme commenced on
1 July 2013
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:
• the application for private ruling, and
• further information received including statement of claim and court documents.
You were an employee.
You were involved in a workplace accident and were left unable to continue employment after you had surgery.
Your employer refused to pay you during the course of your incapacitation.
You lodged a claim for loss of earnings.
You received a payment for loss of income. This amount is showing as assessable income on your payment summary.
You incurred legal expenses.
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.
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.
In Tax Determination TD 93/29 Income tax: if an employee incurs legal expenses recovering wages paid by a dishonoured cheque, are these legal expenses an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997? the Commissioner states that legal expenses incurred by an employee in recovering unpaid wages are deductible under section 8-1 of the ITAA 1997, as the expenses are directly incurred in the process of deriving assessable income.
Similarly you incurred legal expenses in relation to compensation for loss of your income. As the payment represents a replacement of your salary and wages, it is considered to be revenue in nature and assessable. The associated legal expenses in relation to your payment relates sufficiently to the earning of your assessable income and are therefore deductible under section 8-1 of the ITAA 1997.