Private ruling: Deductions - legal expenses
Date of advice: 19 July 2024
Published: 2 September 2024
Ruling period: Year ended 30 June 20XX
Date scheme commenced: XX April 20XX

Ruling: Q1: Are you entitled to claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the legal expenses you incurred? | A1: Yes. Section 8-1 of the ITAA 1997 provides that you can deduct from your assessable income any loss or outgoing that you incur in gaining or producing your assessable income. Based on the facts provided the Commissioner accepts that the legal expenses you incurred in lodging a Fair Work Commission Order and a WorkCover Claim had the relevant connection to the earning of your assessable income.

Relevant facts and circumstances: You were employed by Company A (Your Employer). You were subjected to various instances of workplace bullying and harassment by a Senior Executive. In month 20XX you commenced medical leave because you could no longer perform your duties. You had complained to your manager about the bullying conduct on numerous occasions. No action was taken to prevent the bullying behaviour from escalating or being repeated. The bullying caused a significant deterioration in your health and general functioning. You were prescribed medication to deal with these symptoms, and received ongoing treatment from your general practitioner. In month 20XX you engaged the services of your Lawyers to assist you in escalating your complaint and lodging an application with the Australian Fair Work Commission, to request that the bullying and harassment stop, so that you could return to work. At the time of writing the application, you had been certified as unfit for work. On XX month 20XX correspondence was issued to the CEO of Your Employer advising that since you remained on medical leave and no action had been taken to address your complaints, an "Application for an order to stop bullying" had been drafted with the Fair Work Commission under the Fair Work Act 2009 and would be lodged shortly. Your Lawyers assisted you with applications for Workers Compensation and Income Protection insurance for income continuity during this time. You remained on personal leave pending these applications. On XX month 20XX your Lawyer received and discussed a written response from your Employer's Lawyers l that the complaint had been received and that they would shortly commence a workplace investigation. This was the first acknowledgment of your complaints. Your Lawyer continued to correspond with you, your Employer and their Lawyer regarding both the application and response to the Fair Work Stop Bullying Order and also the commencement of a workplace investigation by another Law Firm (Law Firm A). This included numerous correspondence and the provision of medical reports and information related to the complaint. Your Lawyer continued to act on your behalf throughout the investigation and submitted evidence and documentation to both Law Firm A and Your Employer's Lawyers in preparation for a conciliation hearing set with the Fair Work Commission. The conciliation hearing was conducted including you Lawyers, your Employer's inhouse legal team, your Employer's Lawyers, the complaint respondent's legal team and Law Firm A who were conducting the investigation. The Commissioner reviewed the case and after an unsuccessful attempt to negotiate a conciliation allowing your return to work or exit from your Employer, instructed that the workplace investigation continue and be completed within a matter of weeks before reappearing before the commission. As you remained too unwell to be interviewed directly, your Employer handled all correspondence, evidence provision and responses between the necessary parties to allow the investigation to be completed. During the next few months, an extension of scope and further trust payments for legal expenses incurred were made to your Lawyers to allow the investigation to be completed. Shortly after, your Workers Compensation claim was approved and salary continuance payments commenced. Up to this point you had been utilising a combination of paid personal leave, unpaid leave and also Income Protection insurance. As the workers compensation was backdated, you were then required to reimburse Company X for the Income Protection payments received to date. On XX November 20XX your Lawyers received correspondence from your Employer advising the investigation had been completed and informing you of the outcomes and next steps. In this correspondence, your Employer advised that: "on the balance of probabilities that one of the allegations against the Senior Executive were substantiated. Your employer confirms that it has taken reasonable management action in relation to the substantiated allegation against the Senior Executive and based on the outcome of the confidential investigation, your Employer now views the investigation as closed." The correspondence did not include any detail of the "reasonable management action" undertaken, nor any provisions for you return to work. On XX month 20XX, The Fair Work Commission requested an update on the matter and outcomes of the investigation. On XX month 20XX, after multiple meetings, your Lawyer provided a written update to the Commissioner advising that the investigation findings did not address each of the allegations separately and distinctly in terms of establishing a pattern of bullying conduct. A request was made to the Commission to take the matter out of abeyance and list for Directions. A Directions Hearing was subsequently scheduled. Your lawyers received Draft Consent Orders from your Employer's Lawyers on behalf of your Employer. You received this late in the evening prior to the Fair Work Hearing the next day and it caused you considerable confusion and distress. You met with your Lawyers to clarify your Employer's intent and the meaning of the Consent Orders. The legal advice was that your Employer did not wish to mediate further and were requesting to proceed to a full hearing, further witness testimony, affidavits and a further lengthy and expensive legal proceeding. The advice from your Lawyers was that further action would be lengthy given the volume of evidence provided and duration of the harassment, expensive and your Employer did not appear to have any interest in mediation or the impact on your health or the provision of a safe workplace to return to. The advice was that your Employer were likely to terminate your employment for incapacity, and also seek to recover any legal costs incurred should the complaint not be withdrawn. As this caused you considerable distress on top of already being unwell, your instructions were to cease action and withdraw your complaint. The Fair Work Commission, legal teams and your Employer were advised of the complaint withdrawal approximately 10 mins prior to the scheduled hearing. You issued instructions to your Lawyers that you could not proceed with further action regarding the complaint. Your Lawyer provided some further guidance around the status of the Workers Compensation and Personal Injury options open to you. You then received advice through your Lawyers that your Employer had lodged an application for the Workers Compensation Regulator to review the approval decision made by WorkCover in State X regarding payment of salary continuance for the injury sustained as a result of the work related bullying and harassment. The review process was conducted as per the Workers' Compensation and Rehabilitation Act 2003 . You sought initial advice from your Lawyers and then drafted a response to the appeal. At the time, the appeal appeared to be attempting to mitigate further risk to your Employer for any future damages or compensation you may have been entitled to, even though no such claim or application had been made and you were still an employee. You received advice from your Lawyer to guide your response. On XX month 20XX, you received correspondence from the Workers Compensation Regulator that the review was complete and as your employer had taken "reasonable management action" that you were not entitled to further compensation. You did not appeal the decision and your private income protection payments were reinstated. You received correspondence from your Employer requesting medical information from your treating practitioner including your ability and capacity to return to your role. This medical information was provided to your Employer, confirming your ongoing injury and treatment. Shortly after a meeting was held at your Employer's request between you, your Employer's Executive General Manager Human Resources and Senior Industrial Relations Advisor. You were asked to provide a written response to show cause why your employment should not be terminated based on the medical evidence provided and extent of your work-related absence. You provided this information, and were then subsequently terminated for incapacity. During the relevant income year, you incurred $X in legal expenses associated with lodging a Fair Work Commission Order and the WorkCover Claim.

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