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Edited version of private advice
Authorisation number: 1052254694767
Date of advice: 10 June 2024
Ruling
Subject: Legal expenses
Question
Are you entitled to a deduction for the legal expenses in the income year you incurred them?
Answer
Yes.
In determining whether a deduction for legal expenses is allowable under section 8-1 of the Income Tax Assessment Act 1997, the nature of the expenditure must be considered. Legal costs take their quality as an outgoing of capital or revenue nature from the purpose of incurring the expenditure.
The information provided indicates that the purpose of incurring your legal expenses in this case was to obtain underpaid performance bonuses. The deductibility of the legal expenses depends on whether the payments sought were revenue or capital in nature. Performance bonuses are revenue in nature. Therefore, the legal expenses you incurred in seeking underpaid performance bonuses are deductible. The legal expenses are deductible in the income year in which they were incurred.
This private ruling applies for the following periods:
Year ended 30 June 20XX
Year ending 30 June 20XX
The scheme commenced on:
1 July 20XX
Relevant facts and circumstances
You were employed by Z for a number of years in various managerial roles.
For each role, you were eligible to earn performance bonuses as part of your total remuneration package.
You opted for voluntary redundancy in XX/20XX on grounds of unfair performance ratings from 20XX onwards.
Subsequently you followed up with Z about the unfair performance ratings and their impact on the calculation of your performance bonuses.
The outcome of this discussion was not positive.
You engaged a law firm in XX/20XX and commenced legal proceedings against Z citing unfair performance ratings from 20XX to XX/20XX which impacted the performance bonuses you received. You claimed for payment of underpaid performance bonuses.
In XX/20XX you reached a settlement with Z with the payment of $X being agreed to in settlement of your claim.
Your legal expenses totalled $X with $X incurred in the 20XX-XX income year and $X incurred in the 20XX-XX income year.
You are not entitled to any reimbursement or recoupment of any of the legal expenses you have paid.
The $X payment is recorded as income on your payment summary from Z for the 20XX-XX income year.
You will be including the $X payment as assessable income in your 20XX-XX income tax return.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1