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Edited version of your private ruling
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Ruling
Subject: Deductions - legal expenses
Question
Are your legal expenses, accommodation and travel costs incurred in pursuing an action for reinstatement of your employment deductible?
Answer
No
This ruling applies for the following period:
Year ending 30 June 2012
The scheme commences on:
1 July 2011
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
You were injured at work several years ago. After surgery to correct the injury you successfully returned to work. After you lodged a claim for compensation for your injury your employment was terminated.
You commenced proceedings to have your employment reinstated. You also wished to claim for loss of wages and other items.
You have incurred legal expenses, accommodation and travel expenses in the pursuit of your claim.
Your proceedings have not yet finalised due to appeals lodged by your employer.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses or 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 under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered. (Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 3 AITR 436; (1946) 8 ATD 190)
The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses. For example, 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. Therefore, to determine the deductibility of the legal expenses, it is necessary to consider the reason for which expenses were incurred.
The Courts, Boards and Tribunals have consistently held that legal expenses incurred by taxpayers in seeking to regain their employment following dismissal are not deductible. The expenses have been incurred too early to be regarded as having been incurred in gaining or producing the taxpayers' income from that employment.
In Administrative Appeals Tribunal Case L26, 79 ATC 126; 23 CTBR (NS) 219 a teacher was denied a claim for legal expenses incurred in appealing against her dismissal from employment because she could not control classes. It was found that the outlay was a necessary step prior to gaining or producing the taxpayer's income but it was not an outlay incurred in the course of gaining or producing such income.
Taxation Determination TD 93/29 which considers the deductibility of legal expenses also states at paragraph 5:
...if the legal action goes beyond a claim for a revenue item such as wages, and constitutes an action for breach of the contract of employment, the legal costs would not be deductible because they are capital in nature. For example, legal expenses relating to an action for damages for wrongful dismissal are not deductible.
Accordingly legal expenses incurred in seeking reinstatement of employment are of a capital nature and, therefore, not deductible. This is because the advantage sought in incurring the expenses is of a capital nature rather than of an income nature. The purpose of the expenditure is to re-establish an income stream or to gain an enduring benefit i.e. the reinstatement of the employment position.
In your case, after your employment was terminated, you took legal action to obtain reinstatement of your employment. The legal expenses you incurred in seeking reinstatement are considered to be incurred at a point in time too soon to be regarded as expenses incurred in the actual course of gaining or producing your assessable income. This is also the case for your accommodation and travel expenses.
Furthermore, in accordance with the Commissioners view provided in TD 93/29, legal expenses relating to an action for wrongful dismissal are not deductible as they are of a capital nature. Consequently, the legal expenses you incurred are not an allowable deduction under section 8-1 of the ITAA 1997.
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