Edited version of private advice

Authorisation Number: 1052190594060

Date of advice: 20 November 2023

Ruling

Subject: Legal expenses

Question 1

Can you claim a deduction for all your expenses in accordance with section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Can you claim the cost of your medical treatment expenses?

Answer

No.

Question 3

Can you claim a deduction for the portion of your legal expenses incurred in obtaining advice to resolve the dispute with your employer prior to your resignation?

Answer

Yes.

Question 4

Can you claim a deduction for the portion of your legal expenses incurred in obtaining advice that relates to your claim for seeking compensation for injury and / or loss of future earnings?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2023

Year ending 30 June 2024

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

In 20XX, you commenced your employ with your Employer.

On or around DD MM 20XX, you submitted a written complaint to your Employer regarding ongoing issues, including but not limited to, bullying, discrimination, mistreatment, abuse of authority, and sexual harassment in the workplace.

On or around DD MM 20XX, you entered into a signed deed of release with your Employer. You received a lump sum payment and remained in their employ.

On or around DD MM 20XX, you took a leave of absence due to stress and you engaged a lawyer to pursue the ongoing issues outlined above with your Employer.

On or around MM 20XX, you submitted a workers compensation claim.

On or around DD MM 20XX, you resigned from your Employer.

On or around DD MM 20XX, your workers compensation claim was declined by the insurer.

On or around DD MM 20XX, investigation/ review of your workers' compensation claim was declined by the insurer.

You have incurred legal expenses of approximately $X.

You have incurred medical expenses for consultations with your treating health professionals of approximately $X.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5.

Income Tax Assessment Act 1997 section 8-1.

Reasons for decision

Question 1

Can you claim a deduction for all your expenses in accordance with section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

No.

Question 2

Can you claim the cost of your medical treatment expenses?

Answer 2

No.

Question 3

Can you claim a deduction for the portion of your legal expenses incurred in obtaining advice to resolve the dispute with your employer prior to your resignation (an existing employment agreement)?

Answer 3

Yes.

Question 4

Can you claim a deduction for the portion of your legal expenses incurred in obtaining advice that relates to your claim for seeking compensation for injury and / or loss of future earnings?

Answer 4

No.

Summary

The legal expenses you incurred defending and protecting the rights of an existingemployment agreement are allowable deductions under section 8-1 of the ITAA 1997.However, you are not entitled to claim a deduction under section 8-1 of the ITAA 1997 for legal expenses incurred in obtaining a release from your employer on the basis that it does not relate to the gaining or production of income. This means you cannot claim the expenses incurred obtaining legal advice in relation to your resignation.

Medical treatment expenses are considered to be private in nature and are not deductible.

If the legal action goes beyond a claim for a revenue item such as wages and constitutes an action for example, breach of the contract of employment, where the essential character of the advantage sought relates to an enduring advantage that is of a capital nature, the legal costs would not be deductible.

Detailed reasoning

Section 8-1 of Income Tax Assessment Act 1997 (ITAA 1197) 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.

Costs associated with settlement of disputes arising out of an existing employment agreement

Taxation Ruling 2000/5 Income tax and fringe benefits tax: costs incurred in preparing and administering employee agreements (TR 2000/5), sets out the Commissioner's view on the application of section 8-1 of the ITAA 1997 to costs incurred by employees and employers in preparing and administering employment agreements. Where costs were incurred were toresolve a dispute with your employer, you will be entitled to a deduction under section 8-1 of the ITAA 1997 for the cost of representation (paragraph 2 of Taxation Ruling TR 2000/5).

You will not be entitled to claim a deduction under section 8-1 of the ITAA 1997 for expenses incurred in obtaining a release from your employment, on the basis that it does not relate to the gaining or production of income.

Medical expenses

Generally medical expenses do not have a direct connection to the gaining or producing of income and are therefore generally regarded as private expenses. It is a long-standing principle that a taxpayer does not satisfy section 8-1 of the ITAA 1997 merely by demonstrating some casual connection between the expenditure and the derivation of income. The expenditure must be incurred in gaining or producing your assessable income (Lunney v Commissioner of Taxation (1958) 100 CLR 478). These principles have been affirmed by the High Court in Commissioner of Taxation v Payne [2001] HCA 3.

Legal expenses

Generally, legal expenses have been held to be deductible if the expenses are directly related to the earning of income.

Taxation Determination TD 93/29 Income tax: if an employee incurs legal expense recovering wages paid by a dishonoured cheque, are these legal expenses an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997? outlines the Commissioners view on legal expenses. The ruling states that if an employee incurs legal expense in recovering wages, the legal expensesare an allowable deduction providing that the legal action relates solely to the recovery of wages.

However, if the legal action goes beyond a claim for a revenue item such as wages and constitutes an action for example, breach of the contract of employment, where the essential character of the advantage sought relates to an enduring advantage that is of a capital nature, the legal costs would not be deductible. For example, legal expenses relating to an action for damages for wrongful dismissal or a breach of employment contract, are not deductible.

There will often be occasions where the legal expenses are incurred in relation to proceedings that relate both to amounts that are revenue in nature as well as amounts which are capital in nature. For example, many proceedings in relation to wrongful dismissal will also involve the recovery of unpaid salary or wages. In these circumstances' there must be some fair and reasonable assessment of the extent of the relation of the outlay to assessable income' (Ronpibon Tin N.L. v. F C of T (1949) 78 CLR 47 at 59).

If the advantage to be gained does not have an immediate connection to the duties undertaken to derive income and has more of an enduring and consequently capital nature, then the expenses incurred in gaining the advantage will also be of a capital nature. An amount that is capital in nature will remain capital notwithstanding that it is specifically included in the assessable income of the taxpayer.

In Tax Determination TD 93/29 Income tax: if an employee incurs legal expenses recovering wages paid by a dishonoured cheque, are these legal expenses an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997? (TD 93/29) the Commissioner states that legal expenses incurred by an employee in recovering unpaid wages are deductible under section 8-1 of the ITAA 1997, as the expenses are directly incurred in the process of deriving assessable income.

Expenses incurred to receive compensation for loss of future earnings are not deductible as they are considered to provide an enduring advantage and are therefore capital in nature.

Apportionment of expenses

Apportionment is a question of fact and involves a determination of the proportion of the expenditure that is attributable to deductible purposes. The Commissioner believes that the method of apportionment must be fair and reasonable in all the circumstances. Where legal expenses are not broken up into the relevant parts, you will need to calculate the deductible portion.

Paragraph 7 of TD 93/29 discusses the apportionment of legal expenses

Where the solicitor's account is itemised, one reasonable basis for apportionment would be the time spent involving the revenue claim, relative to the time spent on the capital claim. If the solicitor's account is not itemised, a possible basis for apportionment would be either costing of the work undertaken by the solicitor in relation to the revenue claim, or, where this is not possible, an apportionment on the basis of the monetary value of the revenue claim relative to the capital claim.

Application to your circumstances

In your case, the costs you incurred defending and protecting your rights under your existing employment agreement (prior to resignation) are an allowable deduction under section 8-1 of the ITAA 1997. This is because the expenses relating to legal advice sought prior to your resignation are considered to be revenue in nature.

However, although incurred under an existing employment agreement, you will not be able to claim as a deduction the legal expenses incurred in seeking advice to resign from your employer. Nor will you be able to claim as a deduction the legal expenses incurred seeking advice in relation to your workers' compensation claim after you resigned from your employer unless it relates to unpaid wages or entitlements.

You incurred medical treatment costs attending a psychiatrist; these expenses do not have the required nexus with the derivation of assessable income and are of a private nature. Therefore, the expenses are not an allowable deduction under section 8-1 of the ITAA 1997.

You also incurred costs of obtaining a medico legal report. The expenses you have incurred in obtaining this report will only be deductible if it was obtained to resolve a dispute arising out of an existing employment agreement.

As the legal expenses you have incurred are both revenue and capital in nature, you will need to apportion the legal expenses in a reasonable manner. You should apply the above principles in paragraph 7 of TD 93/29 in undertaking the apportionment.