Edited version of private advice

Authorisation Number: 1051661076692

Date of advice: 21 April 2020

Ruling

Subject: Deductions for legal expenses

Question

Can you claim a deduction under section 8-1 of the ITAA 1997 for legal expenses incurred in relation to maintaining your contract of employment?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2019

Year ending 30 June 2020

The scheme commences on:

1 July 2018

Relevant facts and circumstances

You are a permanent full-time senior secondary school teacher. You first started working as a teacher in XXXX.

In XXXX, your child was in hospital and you took several months' long service leave to care for them.

At the end of that year, you requested your union representative negotiate your return to work part time for Term 1 of that year only.

On XXXX, you received a letter via your principal that your hours of employment would be part time commencing from XXXX. On the same date, you also received a further letter via your principal saying that your hours of employment would be full time commencing XXXX.

When you returned to work in Term 1 of that year, however, you were advised that someone else had been allocated two day a week permanent position. You were also advised that there was no funding to return you to full time employment status following your reduced hours in Term 1 of that year.

As per the documentation prepared by the union representative, once Term 2 commenced you began being paid a full time wage as per your employment conditions. You were not, however, timetabled to teach full time.

Once it was discovered that you were being paid for full time employment, Education XXXX began seeking repayment of $XXXX from you.

You did not teach full time for the whole of the XXXX school year. Education XXXX continued to seek repayment of $XXXX from you.

In XXXX, you were served with a claim for repayment of the outstanding amount.

In that same year, you were also investigated for unethically obtaining the amount of $XXXX. You were cleared of any wrongdoing following this investigation.

The following year, you were served with an amended claim for $XXXX including amounts for interest and costs.

You engaged a solicitor to help with your legal issues including reduction of your full time employment position to three days a week and allegations of bullying you experienced by Education XXXX.

You remain employed by Education XXXX but are currently on leave. You have continually tried to take action following your employment contract being reduced to 30 hours per fortnight from 50 hours per fortnight without your consent.

You have spent $XXXX on legal expenses in relation to this matter.

Relevant legislative provisions

Income Tax Assessment Act 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, or relate to the earning of exempt income.

In determining whether a deduction for legal expenses is allowable, the nature or character of the expenditure must be considered, that is, whether the legal expenses are incurred for a capital or a revenue purpose (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. For example, if the advantage to be gained is of a capital nature, then the legal expenses incurred in gaining the advantage will also be of a capital nature and are not deductible. It also follows that the character of legal expenses is not determined by the success or failure of the legal action.

In your situation, you have incurred legal expenses following the serving of a claim on you for repayment of overpaid wages. You then incurred further legal expenses following an amended claim being served on you for repayment of costs and interest plus the overpaid wages amounts.

You incurred legal expenses as a result of your employment and your attempts to maintain your 50 hours per fortnight employment. This means that in this instance, you have incurred the costs in connection with the earning of your assessable income and the expense has an immediate connection to the earning of that income. Therefore, the costs are of a revenue nature and will be deductible under section 8-1 of the ITAA 1997.