ATO Interpretative Decision

ATO ID 2002/391

Income Tax

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Issue

Is the taxpayer entitled to claim a deduction under 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the legal expenses they incurred in order to recover their unused annual leave and unused long service leave from their ex-employer?

Decision

Yes. The legal expenses directly relate to the gaining or producing assessable income and are deductible under section 8-1 of the ITAA 1997.

Facts

The taxpayer ceased employment with their employer.

The employer refused to pay the taxpayer amounts in respect of unused annual leave and unused long service leave.

The taxpayer took action through the Industrial Relations Commission. The taxpayer incurred legal costs in obtaining a judgement in respect of the unused annual leave and unused long service leave.

The Commission ordered the ex-employer to pay the taxpayer an amount representing the taxpayer's unused annual leave and unused long service leave.

Reasons for Decision

Section 8-1 of the ITAA 1997 states that you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing assessable income and is not:

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Capital, private or domestic in nature,

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Incurred in gaining or producing exempt income, or

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Prohibited by a section of the ITAA 1997 or the Income Tax Assessment Act 1936 (ITAA 1936).

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the year. Salary and wages, including annual leave payments, is considered ordinary income as it is paid directly as a result of the personal services an employee renders for their employer.

However, unused annual leave and unused long service leave (although acquired through personal services and thus characterised as ordinary income) are considered to be forms of statutory income under section 6-10 of the ITAA 1997.

Section 26AC of the ITAA 1936 provides concessional tax treatment for unused annual leave received as a lump sum. Section 26AD provides concessional tax treatment for unused long service leave received as a lump sum. Although the tax treatment of these amounts is different to salary and wages (including payments in respect of leave taken) earned during the course of employment, it does not alter the character of the payments as ordinary income.

The legal expenses incurred by the taxpayer in order to obtain the unused annual leave and unused long service leave resulted in the taxpayer gaining assessable income. There is a clear connection between the assessable income and the expense. The expenses were not incurred in respect of income that was capital, private or domestic in nature.

Accordingly, the legal expenses were incurred in gaining the taxpayer's assessable income and are deductible under section 8-1 of the ITAA 1997.

Legislative References:
Income Tax Assessment Act 1997
   section 8-1
   subsection 6-5(2)

Keywords
Compensation income
Legal expenses

Siebel/TDMS Reference Number:  DW292854

Business Line:  Small Business/Individual Taxpayers

Date of publication:  28 March 2002

ISSN: 1445-2782