Private ruling: The deductibility of legal expenses
Published: August 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for expenses relating to the recovery of unpaid employment salary and wages and unused leave from your employer? | A1: Yes. | Q2: Are you entitled to a deduction for expenses relating to the recovery of unpaid Superannuation contributions from your employer? | A2: No.

Relevant facts and circumstances: You were employed by a company. You resigned from your employment, giving your employer four weeks' notice. Your employer advised that you were required to give more notice. This requirement was a part of an employment contract that you did not sign. Consequently you were not paid some of your employment entitlements until the period of notice was completed. Your unpaid entitlements consisted of unpaid wages, Superannuation and accrued leave. You incurred legal costs, as you employed a solicitor to represent you in recovering your unpaid entitlements. Your entitlements were paid.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a loss or an outgoing is an allowable deduction if it is incurred in producing assessable income or in carrying on a business for the production of assessable income, unless that loss or outgoing is capital or of a private or domestic nature. In determining whether a deduction for legal and other expenses is allowed under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered ( Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634). The nature or character of the expenses follows the advantage which is sought to be gained by incurring the expenses. If the advantage to be gained is of a capital nature then the expenses incurred in gaining the advantage will also be of a capital nature. | Detailed Reasoning - Unpaid wages: You have incurred the expenses in relation to the recovery of unpaid salary and wages. These amounts are revenue in nature as they are considered to fall within the meaning of ordinary income. There is a clear connection between the expenses you have incurred and the advantage sought in the form of the assessable income you have derived. Accordingly, the legal expenses incurred in gaining your assessable unpaid salary and wages are deductible under section 8-1 of the ITAA 1997. | Detailed Reasoning - Annual leave: Legal expenses incurred in order to obtain unused annual leave generally results in the taxpayer gaining assessable income. Therefore there is a clear connection between the assessable income and the expense incurred. Furthermore the expenses are not in respect of income that is capital, private or domestic in nature. Accordingly, the legal expenses incurred in gaining your assessable annual leave entitlements are deductible under section 8-1 of the ITAA 1997. | Detailed Reasoning - Superannuation contribution: Mandatory employer superannuation contributions do not form part of your assessable income. They are paid as a requirement of the Superannuation Guarantee (Administration) Act 1992 . Although you may have suffered a loss as a result of the non payment of these contributions the loss cannot be said to be a loss or outgoing incurred in order to earn your assessable income. The amount of your assessable income is not affected by the non payment of superannuation employer contributions. In your case part of your legal costs related to recovering unpaid superannuation payments. As the superannuation payments are not considered part of your assessable income it cannot be said that the legal expenses were incurred in the process of deriving assessable income. As such you are not entitled to a deduction under section 8-1 of the ITAA 1997 for the associated legal expenses. | Detailed Reasoning - Apportionment of expenses: As your legal expenses are not fully deductible, you will need to apportion the expenses using a reasonable basis. Where legal expenses are not broken up into the relevant parts by your solicitor, you will need to calculate the deductible portion. One way to apportion your expenses is according to the dollar value of the assessable amount as compared to the total amount being sought. The relevant percentage that relates to your assessable income can then be applied to the legal expenses incurred. The rulings in the register have been edited and may not contain all the factual details relevant to each decision. Do not use the register to predict ATO policy or decisions.