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Edited version of your written advice
Authorisation Number: 1012862952490
Date of advice: 19 August 2015
Ruling
Subject: Legal expenses
Question 1
Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for legal expenses incurred in relation to a legal action to recover unpaid wages and interest?
Answer
Yes
Question 2
Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for legal expenses incurred in relation to a legal action to recover unpaid superannuation contributions?
Answer
No
This ruling applies for the following periods:
Year ended 30 June 2015
The scheme commences on:
1 July 2014
Relevant facts and circumstances
You were employed by your past employer for approximately 3.5 years. Throughout this period you were underpaid wages and superannuation contributions. You undertook legal action to recover the unpaid wages and superannuation contributions.
You were successful in your action and were awarded the unpaid wages and superannuation, plus interest.
You incurred legal expenses in respect of this action.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.
The courts have considered the meaning of 'incurred in gaining or producing the assessable income'. In Ronpibon Tin NL Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; 56 ALR 785; 8 ATD 431 the High Court stated that
'For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The words "incurred in gaining or producing assessable income" mean in the course of gaining or producing such income.'
The expenditure must therefore be related to the production of assessable income.
Legal expenses
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 (Magna Alloys & Research Pty Ltd v. Federal Commissioner of Taxation 80 ATC 4542 at 4548; 11 ATR 276 at 283).
In your case the advantage sought is the recovery of unpaid wages and superannuation contributions plus interest.
In the case of the unpaid wages and interest, the advantage sought is the recovery of an amount on revenue account. As such, the character of the expenditure is also of a revenue nature.
As the occasion for the incurring of the legal expenses is to recover unpaid wages plus interest, both of which are assessable as ordinary income, there is sufficient connection between these expenses and the gaining or producing of your assessable income. Therefore, the legal expenses incurred to obtain your unpaid wages and interest will have been incurred in gaining or producing assessable income.
In contrast, employer superannuation contributions do not form part of your assessable income. They are paid as a requirement of the Superannuation Guarantee (Administration) Act 1992. Although you may have suffered a loss as a result of the non-payment of these contributions the loss cannot be said to be a loss or outgoing incurred in order to earn assessable income. Assessable income is income that is subject to income tax. The amount of your assessable income is not affected by the non-payment of superannuation employer contributions.
Accordingly, you will only be entitled to a deduction under section 8-1 of the ITAA 1997 for the legal expenses that you incur in relation to the legal action to recover unpaid wages and interest. The amount of legal expenses you have incurred will need to be apportioned between the unpaid wages and interest, and the unpaid superannuation contributions.