Private ruling: The deductibility of legal expenses
Date of advice: 8 March 2017
Published: August 2017
Ruling period: Year ended 30 June XXXX
Date scheme commenced: 1 July XXXX

Ruling: Question and answer: | Are you entitled to claim a deduction for legal expenses incurred as a result of the legal proceedings against your employer? | Yes.

Relevant facts and circumstances: You were employed by entity XYZ. During the financial year you became ill and as a result were required to take sick leave. As a condition of your employment agreement provided that there was no restriction to how many sick days you were entitled to take. Contra to the conditions of your employment agreement, your manager instructed the entity XYZ pay office to cease paying you sick leave. In order to resolve the issue you engaged a lawyer and commenced legal proceedings. The outcome of the legal proceedings was that your employer was required to pay all outstanding sick leave entitlements. You incurred legal fees pursuing this outcome.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 6-5 | Income Tax Assessment Act 1936 Section 6-10 | Income Tax Assessment Act 1936 Section 8-1

Reasons for decision: Detailed Reasoning - Deduction - legal expenses: Section 8-1 of the 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. Taxation Ruling TR 2000/5 Income tax and fringe benefits tax: costs incurred in preparing and administering employment agreements, discusses the Commissioners view of the application of deductibility of expenses incurred by employees and employers in preparing and administering employment agreements. Paragraph 2 of Tax Ruling 2000/5 states: 2. The following costs incurred by an employee are an allowable deduction: ● costs of drawing up an employment agreement with an existing employer to replace an award or in accordance with a provision in the existing agreement; ● costs associated with settlement of disputes arising out of an existing employment agreement including the cost of representation; ● costs of changing the conditions of an existing employment agreement with the same employer - providing the existing agreement allows for changes - be it a variation, re-negotiation of an existing agreement or upon a promotion; and ● costs of renewing or extending a fixed term agreement which has a provision allowing for renewal or an extension at the end of a term. In your case, while employed with entity XYZ a dispute occurred in relation to your sick leave provisions. In order to resolve the dispute you undertook legal proceedings that led to your employer paying all your sick leave entitlements. This action resulted in you incurring legal expenses. Therefore consistent with the principles established in TR 2005/5, as the expenses that have been incurred arose out of a dispute with an existing employment agreement these expenses will be an allowable deduction. Accordingly, you are entitled to a deduction for the legal expenses that you have incurred in relation to your dispute under section 8-1 of the ITAA 1997.