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Edited version of your written advice
Authorisation Number: 1012915527558
Date of advice: 23 November 2015
Ruling
Subject: Deductibility of legal costs
Question and answer
Are you entitled to a deduction for legal expenses relating to the recovery of your unpaid salary?
Yes.
This ruling applies for the following period:
Year ended 30 June 2015
The scheme commenced on:
1 July 2014
Relevant facts and circumstances
Your employment contract was terminated.
You were owed salary at the time of the termination.
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 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).
Further guidance is also provided in Taxation Determination TD 93/29 which states that where legal expenses are incurred in pursuing an amount of assessable income which is owed those legal expenses are directly incurred in the process of deriving assessable income.
In your case you are pursuing a claim against your former employer for unpaid salary owed to you. The salary is assessable income and therefore the legal fees incurred to have them paid to you are deductible.