Private ruling: Deductions - legal expenses
Date of advice: 9 December 2020
Published: February 2021
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are legal expenses incurred in challenging a Fair Work Entitlement Guarantee (FEG) decision in the Administrative Appeals Tribunal (AAT) deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Are legal expenses incurred in challenging a Fair Work Entitlement Guarantee (FEG) decision in the Administrative Appeals Tribunal (AAT) deductible in the financial year in which the cost was incurred? | A2: Yes

Relevant facts and circumstances: You were employed by Company A in early 19XX. This employment was terminated in early 20YY as the employer had to appoint an Administrator to close its business. Shortly after this your former employer entered liquidation and you were advised to make an application to claim your statutory and employment contractual entitlements under the Fair Entitlement Guarantee Act (FEG). You submitted an application to FEG in mid-year. The FEG assessed you as eligible for these entitlements and issued their calculations for the entitlement figures including long service leave, ETP and redundancy payments. The FEG payment was made approximately XX months later. You disagreed with the FEG calculation of your redundancy payment as this was substantially lower than what you believed was your legal entitlement under the relevant industry award. In early 20XX you submitted an application for review of this calculation. This application was unsuccessful. You therefore engaged solicitors and lodged an application with the Administrative Appeals Tribunal (AAT) I mid-20YY In mid- 20ZZ the AAT issued their ruling stating that you were entitled to the full entitlement of $XXX; and this payment was made by the Department of Jobs and Small Business. This payment was made shortly after. The payment was issued with a PAYG summary and was paid as an Eligible Termination Payment (ETP). The ETP had the following components: • Taxable Component $0 • Tax Withheld $0 • Tax Free Component $XXX The ETP Eligible Termination Payment code on your payment was code "R" which indicates that the payment was made because of genuine redundancy. You incurred the following legal fees in pursuing this matter: Financial Year Fee ($) 2015/20XX $XXX 2016/20XX $YYY 2017/20XX $ZZZ You have paid the legal invoices incurred in defending this charge and now seek a ruling as to their deductibility as a necessary expense incurred in earning your assessable income.

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. Legal expenses are generally deductible if they arise out of the day to day activities of the taxpayer's business (Herald and Weekly Times Ltd v. Federal Commissioner of Taxation (1932) 48 CLR 113; (1932) 39 ALR 46; (1932) 2 ATD 169) and the legal action has more than a peripheral connection to the taxpayer's income producing activities ( Magna Alloys and Research Pty Ltd v. FC of T (1980) 49 FLR 183; (1980) 11 ATR 276; 80 ATC 4542). Similarly, in FC of T v. Day [2008] HCA 53 ( Day ) and FC of T v. Rowe (1995) 31 ATR 392; 95 ATC 4691,the courts accepted that legal expenses incurred in defending the manner in which a taxpayer performed his employment duties were allowable. No significance was placed by the court on the taxpayer's status as an employee. The High Court found in Day that the legal expenses incurred by a taxpayer in relation to disciplinary action taken by their employer are not outgoings of a private or domestic nature. In FC of T v. Elberg (1998) 38 ATR 623 the legal expenses incurred by a doctor in defending criminal charges arising out of the conduct of her medical practice were found by the Federal Court to be deductible. The expenses were characterised as a natural incident of the conduct of the taxpayer's business as a doctor. Furthermore, Taxation Ruling TR 2000/5, sets out the Commissioner's view of the application of section 8-1 of the ITAA 1997 to costs incurred by employees and employers in preparing and administering employment agreements. This includes costs associated with settlement of disputes arising out of an existing employment agreement, including the cost of representation to these disputes are allowable deductions. In your case, your employment exposed you, as an employee, to the action of the FEG and ultimately, to the AAT. You therefore incurred legal expenses in seeking correct redundancy payment mandated by the relevant industry award. That is, the proceedings were internal to your employment relationship. Therefore, the legal expenses you incurred defending and protecting your rights under the employment agreement is an allowable deduction under section 8-1 of the ITAA 1997. It is not of a private or of a capital in nature. If you are reimbursed for your legal expenses, you will be required to declare this on your income tax return in the income year it was received.