Edited version of private advice

Authorisation Number: 1052131996035

Date of advice: 26 June 2023

Ruling

Subject: Deductions - legal expenses

Question

Are the legal expenses you incurred in pursuing employee entitlements deductible in accordance with section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

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.

For legal expenses to constitute an allowable deduction, it must be shown that they are incidental or relevant to the production of assessable income or business operations. The nature of the expense must also be considered. The nature or character of legal expenses follows the advantage that is being sought by incurring the expenses.

You incurred legal expenses to be treated as an employee by your former employer and to obtain unpaid employee entitlements such as wages. The associated legal expenses you incurred relate to the earning of your assessable income and the advantage being sought was revenue in nature. The expenses are therefore deductible under section 8-1 of the ITAA 1997.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

In 20XX, you obtained a licence to work in a certain industry.

You were self-employed on a part time basis and operated with your own personal Australian Business Number (ABN).

You suffered from an injury which limited your capacity for the type of work you were actioning, and you decided to move into the industry in which you had obtained the licence.

As a consequence, you approached Company A to discuss a working arrangement. You did not have any experience in the relevant industry, and you were only seeking work experience. They agreed to provide you with some work experience and access to their systems.

A few months later you entered into a signed agreement with Company A to commence working for the business.

You were advised that Company A did not wish to employ any staff in its business.

You were made aware that you would need to have a company for them to engage with and to pay you through and that you would not be advertising under your company's name, however under your personal name as part of Company A.

You took steps to establish a company structure and have it registered in a business name.

You worked full time with Company A for an extended period.

You were required to have your personal vehicle painted with your personal details and the name and logo of Company A displayed.

You were provided with a Company A email address, and you sent internal and external emails from this address.

You were also provided with business cards that included the phone number of Company A.

A photograph of yourself along with your contact details were included as part of the team for Company A.

A few years later the agreement you entered with Company A concluded.

You contacted an industrial relations consultant as you considered you should have been treated as an employee rather than a contractor and received employee benefits including leave, termination pay and additional salary.

You incurred legal expenses and were issued an invoice for these expenses. These expenses have been paid.

A court hearing was held to determine whether you were employed by Company A and what entitlements you had for wages and allowances under the relevant industry award.

The courts determined that you were employed by Company A and were entitled to employee benefits.

A Deed of Settlement and Discharge states that you were awarded an amount for the following:

•         unpaid superannuation

•         an Eligible Termination Payment

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1