Private ruling: Deductions - legal expenses
Date of advice: 9 December 2021
Published: March 2022
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: 27 April 20XX

Ruling: Q1: Are you entitled to a deduction for your legal expenses to the extent it is incurred to recover your unpaid annual leave and long service leave entitlements? | A1: Yes. Your circumstances meet the principles outlined in Tax Determination 93/29 and are considered to be deductible under section 8-1 of Income Tax Assessment Act 1997 . The advantage sought from legal action is the recovery of amounts that are revenue in nature during the course of your employment. Therefore, there is a sufficient connection between your legal expenses and gaining or producing your assessable income.

Relevant facts and circumstances: You entered into a contract for the provision of services (the first services agreement) with your former employer on XX. You and your business were engaged as an independent contractor with your former employer from XX to XX (the relevant period) to provide consulting services. You had little opportunity to take leave and worked a significant number of hours beyond 38 hours per week. If any leave was taken, annual and personal leave was unpaid due to your classification as an independent contractor. The first agreement was to end on XX, however both parties operated as the first agreement continued beyond that date until XX. In XX, you formally requested to be acknowledged as an employee to reflect the true position of your duties and requested your employment entitlements be reflected for the relevant period. On XX, you were provided with a letter of offer for a position with your former employer. The letter of offer entails: • You will be paid a salary of $XX per annum. • Your terms and conditions will be in accordance with your former employer's current Enterprise Agreement. • You will receive a starting balance of XX days recreational leave which will accrue at the rate of XX days per annum. • Your employer will contribute an amount equivalent to XX% of your superannuation salary to an accumulation fund. On XX, you officially commenced employment with your former employer as an employee. On XX, you were pressured to cash out your XX weeks annual leave as it was deemed to be an excessive accrual of over XX days. You cashed out your annual leave in XX. On XX, you formally requested for your commencement date and length of service to be corrected for the purpose of correcting your employment entitlements for the relevant period. However, your service for the relevant period was not reflected in any entitlements or recognition of service. On XX, you terminated your employment with your former employer. You began legal proceedings to recover your employee entitlements for the relevant period. You engaged a legal practitioner to act on your behalf. In a letter dated XX a director of your former employer, you alleged you had an employer-employee relationship with your former employer for the relevant period. For the relevant period, you claim the characterisation of the relationship between you and your former employer as principle and independent contractor to be deceptive, false, and misleading. You alleged your former employer of sham contracting and argued the true nature of the relationship between you and your former employer can be determined by the work performed. • You did not advertise your services or provide services to any other organisation for the length of your engagement • You were unable to employ or delegate work to other employees of your own or those with your former employer • You had little control over the work performed or the nature of the work performed and acted upon the direction of you contact manager. • You were presented as a representative of your former employer and had a business e-mail address demonstrating your role in the organisation • Your tools and equipment, being office supplies, furniture and stationery were provided by your former employer. You claimed you were entitled to be considered an employee for the relevant period. Therefore, you should also be entitled to employee entitlements for the relevant period. You calculated your entitlements based off the National Employment Standards in the absence of an employment contract. • Accrued annual leave of XX hours after X weeks of annual leave is deducted. • Personal leave entitlements of XX hours which you have foregone to the benefit of your former employer. • Long service leave entitlements of XX weeks for the relevant period. XX weeks in total for the XX years of service as of XX. • Superannuation guarantee contributions of a minimum of XX hours at $XX per hour. You advised you were willing to resolve the matter with a settlement amount comprising of employment entitlements owed to you. Claim $ Annual leave entitlements XX Long service leave entitlements XX Superannuation contributions XX Total XX In addition, you also requested a sum of $XX including GST for legal fees incurred to date as apart of the settlement offer. On XX, you began legal proceedings against your former employer in the Country Court of Victoria. On XX your former employer filed a counterclaim against you. Their defence was they believed your relationship with them was a principle and independent contractor relationship for the relevant period. Your former employer claimed the first agreement terminated around XX and a new agreement between your company and your former employer was made for the provision of the services (the second agreement). Your former employer stated in XX, you had changed the business structure of your business to a company, and they changed the contract records to record your company as the entity engaged for the provision of services for the second agreement. Your former employer claimed services were issued by your company, and your former employer made payments for the services to your company from XX to XX. Your former employer argued because you were an independent contractor for the relevant period, you were not entitled to personal leave, annual leave, superannuation contributions, annual leave loading or long service leave entitlements. You advised the existence of the second agreement could not be proven by your former employer and the counterclaim matter did not proceed in the County court. On XX, your former employer applied for the Superannuation Guarantee Amnesty for the relevant period and $XX was paid to the Australian Taxation Office (ATO). On XX the ATO processed the Amnesty application and transferred $XX to your superannuation fund. The balance of the Amnesty payment was credited to your former employer on the basis it exceeded your applicable quarterly maximum contribution base. An agreement between you and your former employer was reached without your former employer admitting liability with a Deed of Settlement signed on XX. The settlement amount provided in the Deed of Settlement was the amount paid by your former employer to your superannuation fund (via the SGC Amnesty) in lieu of all entitlements. You have incurred the following legal fees and provided the tax invoices from your legal practitioner. All amounts include GST. Year Amount ($) 20XX XX 20XX XX 20XX XX 20XX XX Total XX You wish to claim a deduction for the portion of the claim which you consider to be revenue in nature. You have worked this out to be XX% of the total claim consisting of annual leave and long service leave entitlements as per letter dated XX to the director of your former employer. The tax invoices are not itemised; therefore, you have apportioned the legal fees on the basis of the monetary value of the revenue claim relative to the non-revenue claim. Year Amount ($) 20XX XX 20XX XX 20XX XX 20XX XX Total XX You did not have any insurance that covered the legal fees and there was no re-imbursement of legal fees from anyone.

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