Private ruling: Deductions - legal expenses
Date of advice: 3 November 2020
Published: January 2021
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to a deduction for legal expenses in relation to your claim of bullying in the Fair Work Commission? | A1: No

Relevant facts and circumstances: You were employed by Company A in late 20XX. You were subjected to various instances of workplace bullying and various breaches under the General Protections Act by your manager and another executive. You suffered sleep and anxiety issues which were caused or exacerbated by the bullying. You attempted to resolve the issues by lodging a grievance in line with the company grievance policy, but with no success. The issues impacted on your ability to carry out your day to day workplace activities. You sought legal advice to assist with the situation. You sent a letter to your employers in early 20YY. In Autumn 20YY you lodged an order to stop bullying in the Fair Work Commission (FWC). In mid-20YY you lodged a General Protections Application Not Involving Dismissal with the FWC. The FWC held a conciliation conference however the matter was not resolved. In Spring 20YY you lodged a statement of claim with the FWC. You separated from your employer in mid-20ZZ upon settlement of a Deed of Release. Under this undated deed you received $XXX for general damages and $XXX "to be apportioned at the direction of the employee (less applicable tax)". Significant legal costs were incurred. These legal invoices were paid by family members, who supported you throughout this matter. You estimate these costs at $YYY based on a statement of account provided by your solicitors.

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

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income. You can deduct these losses or outgoings except where they are of a capital, private or domestic nature, or relate to the earning of exempt income. Legal expenses will be characterised as an outgoing of capital or revenue nature depending on the cause or purpose of incurring the expenditure. The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses. In this instance, your family have incurred the costs as they supported you throughout this matter. The expenses paid by your family were necessary to enable you to continue earning your assessable income and had an immediate connection to the earning of that income. However, you did not incur these costs, as your family incurred these legal costs when they paid the legal invoices. The matter of incurred is discussed in Taxation Ruling TR 2020/1 - Income tax: employees: deduction for work expenses under section 8-1 of the Income Tax Assessment Act 1997 (TR 2020/1) where paragraph 9 states - 9. Under section 8-1, employees can only deduct expenses they have incurred. The term 'incurred' is not a defined term in the law, nor have the courts determined an exhaustive definition. It is well-established, however, that an expense is not incurred if it is only anticipated or expected to arise in the future on the happening of an event. A work expense is incurred when an amount is actually paid or when a definitive obligation to pay the amount arises. See Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions for more detailed guidance on the meaning of 'incurred' and the timing of deductions under section 8-1. Therefore, even though these legal costs are of a revenue nature and could normally be considered for deductibility under section 8-1 of the ITAA 1997, they are not deductible as you did not incur the costs. Your family paid the legal invoices for these actions. Similarly, Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions states - (a) a taxpayer need not actually have paid any money to have incurred an outgoing provided the taxpayer is definitively committed in the year of income. Accordingly, a loss or outgoing may be incurred within section 8-1 even though it remains unpaid, provided the taxpayer is 'completely subjected' to the loss or outgoing. That is, subject to the principles set out below, it is not sufficient if the liability is merely contingent or no more than pending, threatened or expected, no matter how certain it is in the year of income that the loss or outgoing will be incurred in the future. It must be a presently existing liability to pay a pecuniary sum; As stated in TR 97/7 a taxpayer need not actually have paid any money to have incurred an outgoing provided the taxpayer is definitely committed in the year of income. The fact that your family paid these legal costs argues that you were not definitely committed to paying these costs as another taxpayer had accepted this obligation. The term "definitely committed" is not defined in tax law so it assumes it normal meaning. The Cambridge dictionary defines commitment as "a promise or firm commitment to do something". Clearly, if your family have made a commitment to pay your legal invoices, you have not done so. Therefore, you have not made a firm commitment to pay these invoices. Accordingly, as you did not incur the costs, these legal expenses are not deductible.