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Edited version of your written advice
Authorisation Number: 1012834227484
Date of advice: 7 July 2015
Ruling
Subject: Legal expenses
Question
Are the legal expenses relating to the ordinary income you received throughout an employment dispute and as a result of entering into a deed of agreement an allowable deduction?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2014
The scheme commenced on:
1 July 2013
Relevant facts and circumstances
You were employed as a general manager under a contract.
You were stood down on full pay from your position following a report of unsubstantiated workplace allegations.
You sought legal advice during the investigation proceedings initiated by your employer.
Your lawyers submitted a notice of dispute with your employer's lawyers, citing several reasons why the process lacked procedural fairness or natural justice.
The result of this legal action was that the employer's process in relation to these claims was demonstrated to be flawed. This substantially extended your period of employment on full benefits and entitlements throughout the period of dispute.
You continued to be paid in full throughout the period of the dispute, until your resignation.
A Deed of Settlement was entered into, providing full and final settlement of all matters relating to the allegations.
You have provided a summary of income and legal expenses incurred as a result of the proceedings and final settlement payment.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
A claim for a deduction of losses or outgoings falls for consideration under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).
Section 8-1 of the ITAA 1997 states:
(1) You can deduct from your assessable income any loss or outgoing to the extent that:
(a) it is incurred in gaining or producing your assessable income; or
(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
(2) However, you cannot deduct a loss or outgoing under this section to the extent that:
(a) it is a loss or outgoing of capital, or of a capital nature; or
(b) it is a loss or outgoing of a private or domestic nature; or
(c) it is incurred in relation to gaining or producing your exempt income; or
(d) a provision of this Act prevents you from deducting it.
Taxation Determination TD 93/29 states that if an employee incurs legal expenses in recovering wages, the legal expenses are an allowable deduction providing that the legal action relates solely to the recovery of wages. The ruling continues:-
5. However, if the legal action goes beyond a claim for a revenue item such as wages, and constitutes an action for breach of the contract of employment where the essential character of the advantage sought relates to an enduring advantage that is of a capital nature, the legal costs would not be deductible. For example, legal expense relating to an action for damages for wrongful dismissal, are not deductible.
6. There will often be occasions where the legal expenses are incurred in relation to proceedings that relate both to accounts that are revenue in nature as well as amounts which are capital in nature. For example, many proceedings in relation to wrongful dismissal will also involve the recovery of unpaid salary or wages. In these circumstances '….there must be some fair and reasonable assessment of the extent of the relation of the outlay to assessable income' (Ronpibon Tin N.L. v. FC of T (1949) 78 CLR 47 at 59).
You have incurred legal expenses relating to payments which are both revenue and capital in nature.
It is accepted that you have applied a fair and reasonable assessment of the extent of the relation of your outlay to your assessable income in that you have apportioned your legal expenses in direct relation to the percentage of the types of payments you received.
The Commissioner calculates your revenue payment to be a percentage of your total payment, therefore it follows that you are able to claim a percentage of your total legal fees as an allowable deduction under section 8-1 of the ITAA 1997.