Edited version of private ruling

Authorisation Number: 1011579992234

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Legal expenses

Question

Are you entitled to a deduction for legal expenses?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

After raising a number of issues with your employer, you were told that you could no longer work for them.

You were told not to return to work and that you had until the close of business the following day to advise what you would be claiming in terms of a pay out figure or to resign.

You sought legal advice to determine the legality of what your employer did or proposed to do, or whether you were entitled to proceed with an unlawful dismissal claim and what you were entitled to in each scenario.

Even though your solicitor thought you had grounds for an unlawful dismissal claim, you were advised that the swiftest result was to take a pay out. You decided to take this option.

Your employer agreed in principle and your solicitor prepared a Deed of Release.

You incurred a further expense when your employer breached part of the agreed pay out by deducting an amount for your HECS loan deductions.

There was never a dispute over your leave entitlements.

You received the agreed settlement sum. The employment termination payment (ETP) was included on your tax return.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 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.

In determining whether a deduction for legal expenses is allowed, the nature of the expenditure must be considered. The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses. If the advantage to be gained is of a capital nature, then the expenses incurred in gaining the advantage will also be of a capital nature.

Employment termination payments (ETP) are subject to special tax treatment that may result in some or the entire amount being included in the taxpayer's assessable income. However the fact that a capital payment is specifically brought to account as assessable income will not change the nature of the payment. An amount that is capital in nature will remain capital notwithstanding that it is specifically included in the assessable income of the taxpayer.

In your case, you incurred the legal expenses in order to obtain the ETP. Although the ETP is included in your assessable income, the ETP retains its character as a capital receipt.

As the legal expenses were incurred in gaining a capital sum, they will also be of a capital nature and are therefore not deductible.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).