Edited version of private advice

Authorisation Number: 1051775825967

Date of advice: 4 November 2020

Ruling

Subject: Legal expenses

Question 1

Will all of the legal expenses you incurred in relation to your action for unfair dismissal be deductible?

Answer

No

Question 2

Will some of the legal expenses you incurred in relation to your action for unfair dismissal be deductible?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You were employed by XXXX (The Company) from 20XX.

You were originally employed as a contractor then entered into a contract of employment for a permanent position as a manager.

Due to an internal restructure, your permanent position as a manager no longer existed. You were required to find a new position within the company and took up a second contract of employment as a manager. You commenced this position several years after starting with The Company.

In late 20XX, you attended an off-site work event. Following this, allegations of improper conduct were made against you by other employees of The Company.

Early the next year, The Company commenced investigations into the allegations. The following month, as a result of the allegations, you had a meeting with your direct supervisor. They informed you that your salary was being unilaterally varied, including a reduction in base salary. This change also included a reduction in your total target compensation.

You expressed your concerns about the allegations, the way the investigation was being conducted and the variation to your employment conditions via your direct supervisor.

Shortly after, you were issued with a warning letter. This letter advised that the allegations made had been substantiated. As a result, you would be ineligible for a salary increase, promotion or stock grants for the next XX months.

You advised your direct supervisor that you would be commencing sick leave. In support of this, you provided medical certificates advising that you would be unfit for work for several weeks.

You sent a letter to your direct supervisor, expressing your disappointment at the way the investigation had progressed, denying the allegations and requesting a meeting to discuss the possibility of transferring to another area within the organisation.

A short time later, your direct supervisor responded to your letter and denied your request for a meeting. You state that you were not given an opportunity to respond to the allegations made regarding improper conduct.

You sent another letter, again expressing your concerns as per the previous letter.

Your previous lawyer then sent a letter of demand to your previous employer, alleging ongoing harassment, bullying and unfair treatment.

Your previous employer sent a reply letter, denying the allegations made by you and rejecting your offer set out in the Letter of Demand. which you had previously sent.

Your previous lawyer sent a letter to your previous employer's lawyer, advising that you were resigning effective from the date of the letter. Your previous employer accepted this letter of resignation.

You made an application to The Fair Work Commission pursuant to s.365 of the Fair Work Act 2009 (The Act) alleging you were dismissed by The Company in contravention of Part 3-1 of the Act. You sought relief on the grounds that you had a workplace right as an employee to make a complaint or inquiry in relation to your employment and that as a result of exercising that right you were constructively dismissed. In the alternative, you were injured by your employer or had your employment conditions unilaterally altered as a result of exercising your workplace right to make a complaint or inquiry in respect of allegations made against you.

The Fair Work Commission conducted a conference to deal with the dispute. Pursuant to section 368 of the Act, the Fair Work Commission certified that it was satisfied that all reasonable attempts to resolve the dispute have been, or are likely to be, unsuccessful.

You are seeking relief in relation to the following issues:

•         reduction in salary

•         loss of superannuation and income flowing from respondent's contravention of The Act

•         accrued unpaid annual leave

•         car allowance shortfall

•         loss of reputation, pain and suffering

•         out of pocket medical expenses.

Your previous employer initially provided you with a draft Deed of Settlement. This settlement is contingent on you discontinuing proceedings at the Fair Work Commission.

You have recently signed this Deed of Release and Settlement with your previous employer.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Question 1

Summary

You are not able to deduct all of the legal expenses you incurred in taking action against your former employer.

Detailed reasoning

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you can deductfrom your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income. Losses or outgoings of capital, or a capital or private nature cannot be deducted.

Legal expenses are considered to take the nature of the advantage that you are seeking by incurring them. Where an advantage sought is of a capital nature, the legal expenses incurred in obtaining that advantage are also considered to be of a capital nature.

Some of the legal expenses you incurred relate to loss of reputation, pain and suffering and out of pocket medical expenses. Compensation you receive for these reasons would be capital (or private) in nature. Consequently, the legal expenses will also be capital (or private) in nature to the extent they relate to these claims.

As amounts of capital or a capital (or private) nature are not deductible, you are not able to deduct the entire amount of the legal expenses you incurred.

Question 2

Summary

You can deduct some of the legal expenses you incurred in taking action against your former employer.

Detailed reasoning

Section 8-1 of the ITAA 1997 provides that you can deductfrom your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income. Losses or outgoings of capital, or a capital or private nature cannot be deducted.

Legal expenses are considered to take the nature of the advantage that you are seeking by incurring them. Where an advantage sought is of a revenue nature and assessable, the legal expenses incurred in obtaining that advantage are considered to be of a revenue nature and deductible.

Some of the legal expenses you incurred relate to a reduction in your salary, lost income, accrued unpaid annual leave and a car allowance entitlement. Compensation you receive for these reasons would be revenue in nature and assessable. Consequently, the legal expenses will be revenue in nature and deductible to the extent they relate to these claims.

Note: the legal expenses in relation to the super claim will only be deductible to you if you were asking for it to be paid to you and not to a superannuation fund.

It will be necessary to apportion the expenses incurred where they relate both to amounts of a revenue and capital nature. The method of apportionment must be a fair and reasonable assessment of the extent of the relation of the outlay to the assessable income.

Where accounts aren't itemised, a possible basis for apportionment would be either a reasonable costing of the work undertaken in relation to revenue or where not possible, an apportionment on the basis of monetary value of the revenue claim in relation to the capital claim.