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Edited version of your written advice
Authorisation Number: 1012976274130
Date of advice: 26 February 2016
Ruling
Subject: Deductibility of legal expenses
Question and answer:
Are you entitled to a deduction for legal expenses?
Yes.
This ruling applies for the following period:
Year ended 30 June 2016
The scheme commences on:
1 July 2015
Relevant facts and circumstances
You were an employee.
After a number of years you became aware that you became aware that you were being under paid by your employer.
You approached a legal firm to assist you with your claim.
You took your claim to recover lost wages to the local court.
The local court ruled in your favour and your employer was instructed to pay;
• lost wages; and
• any superannuation monies credited to your nominated Superannuation Fund: and
• PAYG withholding.
You incurred legal expenses in relation to your court action.
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.
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).
Taxation 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?, discusses the deductibility of legal expenses.
On the subject of whether a legal expense is a deductible expense, paragraph 1 of Tax Determination TD 93/29 states:
Yes, providing that the legal action relates solely to the recovery of wages. This is because in deciding '... whether expenditure has the character of a capital or of a revenue payment ... the advantage for which the expenditure was incurred must be identified and the manner in which it "is to be relied upon or enjoyed" must be considered ...'. ( Magna Alloys & Research Pty. Ltd. v. FC of T 80 ATC 4542 at 4548; 11 ATR 276 at 283).
In your case, you incurred legal expenses in relation to the recovery of unpaid wages from your employer. The payments you sought were revenue amounts that will form part of your assessable income. Therefore, the advantage sought was not of a capital nature.
Accordingly, you are entitled to a deduction for legal expenses under section 8-1 of the ITAA 1997.