Edited version of private advice

Authorisation Number: 1051648091148

Date of advice: 19 March 2020

Ruling

Subject: Deducting legal expenses

Question

Are you able to claim a deduction for legal expenses incurred in the 2018 income year in a subsequent year as the income resulting from the legal proceeding was not received until that subsequent year?

Answer

No, however you can claim them in the year they were incurred.

This ruling applies for the following period:

30 June 2017

The scheme commences on:

1 July 2018

Relevant facts and circumstances

You commenced employment with AAA in 2012.

You were the victim of harassment in the workplace and were unable to continue with your employment in their office.

In order to recoup lost wages, you engaged BBB lawyers and incurred expenses of $$$ in XXX/2017.

You also engaged CCC Lawyers. CCC have supplied you with a breakdown of expenses. These expenses were incurred by you between XX/XXX/2018 and XX/XXX/2019 totalling $$,$$$.

You received the bulk of your payment for lost wages in the 2019 income year.

According to the information you have supplied your legal expenses span the 2018, 2019 and 2020 income years.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Summary

The legal expenses you incurred in recovering salary or wages are a deductible expense in the year they were incurred.

Detailed reasoning

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.

In determining whether a deduction for legal expenses is allowed under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered. The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses. For example, 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.

Paragraph 3 of TD 93/29 discusses the deductibility of legal expenses in recovering wages and whether the legal expenses are deductible under subsection 51(1) of the ITAA 1936 (now section 8-1 of the ITAA 1997). Where legal expenses are incurred in enforcing a right to recover an amount owing, such as salary and wages, which are fully assessable when received, and retain the nature of income according to ordinary concepts, the legal expenses will be allowed as a deduction as those expenses are directly incurred in the process of deriving assessable income.

A loss or outgoing may be incurred for the purposes of section 8-1 of the ITAA 1997, even though no money has actually been paid out, as long as the expense is a present liability. In this respect, it is not sufficient that the liability to pay is pending, threatened or expected. Rather, there must be a presently existing liability to pay a specific sum.

In your case, you received assessable income for lost wages from AAA in the 2019 income year. You incurred legal expenses in pursuit of this payment of lost earnings. Your legal costs were incurred between XXX/2017 and XXX/2019 totalling $$,$$$. These costs span the 2018, 2019 and 2020 income years. There is a direct connection between your legal expenses and the gaining or producing of your assessable income.

Your legal expenses are deductible when they are incurred, therefore you will not be able to claim the entirety of your legal expenses in the year you received the correlating income. You can however claim a portion of the expense that was directly incurred in each of the three years.