Private ruling: Legal Expenses – unpaid income
Date of advice: 28 March 2018
Published: June 2018
Ruling period: Income year ended 30 June 2016 | Income year ended 30 June 2017
Date scheme commenced: 1 July 2015

Ruling: Q1: Are you entitled to a deduction for legal expenses incurred to obtain unpaid income? | A1: Yes

Relevant facts and circumstances: You were employed. After resigning from your employment you became aware that you had been underpaid your entitlements. You took legal action and incurred expenses to recover the unpaid entitlements.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 subsection 15-2(1)

Reasons for decision: Summary: The legal expenses you incurred to obtain the unpaid overtime and allowances resulted in you gaining assessable income. Therefore, the legal expenses are deductible. | Detailed Reasoning - Detailed reasoning: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) 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. In determining whether a deduction for legal expenses is allowed, the nature of the expenditure must be considered ( 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. Where legal expenses are incurred in pursuing an amount of assessable income which is owed, such as salary and wages, those legal expenses are directly incurred in the process of deriving assessable income and are therefore deductible under section 8-1 of the ITAA 1997 (Taxation 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? ) Salary and wages, including payments for overtime, are included in your assessable income under section 6-5 of the ITAA 1997. Your assessable income also includes the value to you of all allowances provided to you in respect of, or for or in relation directly or indirectly to, any employment or services rendered by you (subsection 15-2(1) of the ITAA 1997). The legal expenses you incurred to obtain the unpaid overtime and allowances resulted in you gaining assessable income. There is a clear connection between the assessable income and the expense. The expenses were not incurred in respect of income that was capital, private or domestic in nature. As such, the legal expenses were incurred in gaining your assessable income and are deductible under section 8-1 of the ITAA 1997.