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Edited version of your private ruling
Authorisation Number: 1012512316057
Ruling
Subject: Legal expenses
Question 1
Are you entitled to a deduction for legal expenses incurred in relation to seeking to recover contractual entitlements owing to you pursuant to your employment contract?
Answer
Yes.
Question 2
If you receive a court ordered amount from your former employer towards your legal fees, does this amount form part of your assessable income?
Answer
Yes.
This ruling applies for the following periods
Year ended 30 June 2013
Year ending 30 June 2014
Year ending 30 June 2015
The scheme commenced on
1 July 2012
Relevant facts and circumstances
You were employed by the Company.
The Company terminated your employment.
You commenced legal action against the Company seeking damages for lost entitlements which you would otherwise have received under your employment contract.
The action was heard in the Court. Your claims were dismissed.
You have lodged an appeal seeking the same damages as contained within the original legal action.
You have incurred legal expenses in relation to the original legal action and the appeal.
If your appeal is successful, the Company may be ordered to pay, or reimburse, your legal expenses in whole or in part.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 20-20
Reasons for decision
Summary
The legal expenses you incur in relation to your legal action against the Company to recover lost entitlements under your employment contract are deductible expenses. Any reimbursement of legal expenses you receive will form part of your assessable income as an assessable recoupment.
Detailed reasoning
Legal expenses
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for losses and outgoings which are incurred in the course of gaining or producing assessable income, unless the losses or outgoings are capital, or are of a capital, private or domestic nature.
Legal costs take their character as an outgoing of capital or revenue nature from the cause or purpose of incurring the expenditure. If the advantage to be gained is of a revenue nature, then the costs incurred in gaining the advantage will also be of a revenue nature.
Where legal costs are incurred to enforce a contractual entitlement which relates to a right to income, even if it is after employment has ceased, the taxpayer will be entitled to a deduction under section 8-1 of the ITAA 1997.
In your case, you have taken legal action to obtain amounts which would have been paid to you under your employment contract had your employment not been terminated. As these amounts would have formed part of your assessable income, the legal expenses incurred are considered to be revenue in nature.
You are entitled to claim a deduction for legal expenses associated with action to recover entitlements payable under your employment contract.
Reimbursement of legal expenses
Subsection 20-20(2) of the ITAA 1997 provides that an amount you receive as a recoupment of a loss of outgoing is an assessable recoupment if:
· you receive the amount by way of insurance or indemnity, and
· you can deduct an amount for the loss or outgoing for the year in which the reimbursed legal costs were received, or you have deducted or can deduct an amount for it in an earlier income year, under any provision of this Act.
If an amount is recouped by way of settlement of a claim for legal costs, it will be an assessable recoupment under subsection 20-20(2) of the ITAA 1997 where the purpose of the settlement is to indemnify the recipient for professional legal costs actually incurred in the conduct of the litigation, where the legal costs were deductible.
You instigated legal action seeking damages for lost entitlements you would have received under your employment contract had, your employment not been terminated. As discussed above, you are entitled to claim a deduction for the legal expenses associated with this action and the related appeal.
As the legal expenses are deductible, any court ordered reimbursement of your legal expenses is considered to be an assessable recoupment and is included in your assessable income in the financial year in which it is received.
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