Edited version of your written advice

Authorisation Number: 1051338229236

Date of advice: 16 February 2018

Ruling

Subject: Legal fees for workplace harassment, workers compensation and return to work matters

Question 1

Are you entitled to a deduction for the legal expenses that you incurred in relation to the lodgment of a workplace complaint about bullying and harassment and the lodgment of a workers compensation claim?

Answer

Yes

Question 2

Are you entitled to a deduction for the legal expenses incurred in relation to your application to the Fair Work Commission about breaches of employment contract and protecting your employment position?

Answer

No

This ruling applies for the following period:

Year ended 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

You were employed as a full time employee.

During your employment a number of incidents and comments from your manager and other staff led you to feeling bullied and harassed. Your health was also affected.

You obtained professional legal advice and assistance from law firm 1 to lodge a complaint regarding the bullying and harassment with your employer.

You incurred costs for the legal services provided by law firm 1 during the time they acted for you. These services involved consultations about, drafting and reviewing the bullying and harassment complaint letters to your employer.

You took leave from work and were diagnosed with generalised anxiety disorder.

You then obtained professional legal advice and assistance law firm 2 in lodging a worker’s compensation claim.

You incurred costs for the legal services provided by law firm 2 during the time they acted for you. These services included continuation of work on the complaint regarding the bullying and harassment lodged with your employer and the lodgment of a worker’s compensation claim in addition to advice about taking on a second job whilst on unpaid leave from your primary employment.

You were certified as not fit for pre-injury duties in certificates from WorkCover on two occasions.

You were then advised your employer had rejected your bullying and harassment allegations as lodged in your complaint, and had denied your request for financial compensation.

You started secondary employment with a new employer in order to meet your financial obligations after being on unpaid leave for over a month and advised your employer of this. You requested a return to work performing suitable duties or further approval of unpaid leave.

Your employer advised that you would not be permitted to return to work until you were medically cleared to return to your position, that further unpaid leave would not be approved without formal application and your computer system access was removed in response to your undertaking secondary employment without first gaining approval from your primary employer.

You then engaged law firm 3 to finalise your workers compensation claim and lodge a stop bullying order with the Fair Work Commission.

You incurred costs for the legal services provided by law firm 3. These services included continuation of the worker’s compensation claim, the preparation and lodgment of an application for an order to stop bullying with the Fair Work Commission, and other activities intended to facilitate a return to your employment.

The insurer accepted liability for your psychological injury that happened at work. They advised you would receive weekly benefits for the periods when you were deemed to have reduced capacity for work. The benefits were calculated based on pre-injury average weekly earnings, current earnings and deductibles.

You have not returned to work with your primary employer.

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 outgoing to the extent that it is incurred in gaining or producing assessable income, except where it is of a capital, private or domestic nature.

Therefore, in determining whether a deduction is allowable under section 8-1 of the ITAA 1997, the nature of the expense must be considered.

The nature or character of legal expenses follows the advantage that is sought to be gained by incurring the expenses (Hallstroms Pty Ltd v. FC of T (1946) 72 CLR 634; (1946) 8 ATD 190). 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.

Legal expenses are generally deductible if they arise out of the day to day income producing activities of the taxpayer (Herald and Weekly Times Ltd v. Federal Commissioner of Taxation (1932) 48 CLR 113; (1932) 39 ALR 46; (1932) 2 ATD 169). The legal action must have more than a peripheral connection to the taxpayer's income producing activities (Magna Alloys and Research Pty Ltd v. FC of T (1980) 49 FLR 183; (1980) 11 ATR 276; 80 ATC 4542).

In FC of T v. Rowe (1995) 60 FCR 99; (1995) 31 ATR 392; 95 ATC 4691, the court accepted that legal expenses incurred in defending the manner in which a taxpayer performed his employment duties were allowable. No significance was placed by the court on the taxpayer's status as an employee.

Question 1

In your case, you allege that you were subjected to bullying and harassment in the work place. You sought legal advice in regard to making a complaint against your manager as this issue has impacted on your ability to carry out your day to day duties and in lodging a workers compensation claim for income replacement due to the injury sustained in performing your duties. Although you were not directly defending the manner in which you performed your duties you were seeking advice regarding a safe environment to carry out those duties.

As the legal expenses were incurred to enable you to carry out your employment duties, there is more than just a peripheral connection to your income producing activities. You are therefore entitled to a deduction under section 8-1 of the ITAA 1997 for the legal expenses incurred in lodging the workplace complaint and workers compensation claims whilst you were employed and performing your income producing activities.

Question 2

The costs incurred in relation to the negotiations around returning to work and the Stop bullying order lodged with the fair work commission are not deductible however as the advantage sought through this process was a reinstatement of your position which is considered capital in nature.

You had started employment with another employer and were on unpaid leave from your primary employer so were not carrying out income producing activities with them and receiving income from them. You were pursuing legal actions to protect your overall employment. The advantage sought is the restoration of a capital asset, that is, your means of producing income. As such the expenses are not deductible under section 8-1 of the ITAA 1997.