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Edited version of private advice
Authorisation Number: 1012680429738
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 2014
The scheme commenced on
1 July 2013
Relevant facts
Your employer advised you that your position was to be made redundant and a one day per week position would be created.
You wanted a guarantee that you would be given the one day position so you sought legal advice.
Your solicitor drew up a Deed of Release which guaranteed you the new position.
You received a redundancy and then commenced in the new position.
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 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 (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. 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.
Taxation Ruling TR 2000/5 Income tax and fringe benefits tax: costs incurred in preparing and administering employment agreements, sets out the Commissioner's view of the application of section 8-1 of the ITAA 1997 to costs incurred by employees and employers in preparing and administering employment agreements.
TR 2000/5 states at paragraph 14 that a deduction is not allowable for the costs of drawing up an employment agreement with a new employer or costs of drawing up an employment agreement upon re-employment with an employer following termination of a fixed term employment contract where the agreement makes no provision for renewal or extension. In your case, you were seeking a guarantee of employment by agreement.
In Federal Commissioner of Taxation v. Maddalena (1971) 2 ATR 541 (Maddalena's case) the Full High Court disallowed the costs of seeking employment by a taxpayer since they were not incurred in the course of gaining or producing income. In this respect, Menzies J stated at 549:
'Does then the expenditure in question fall within the description of an outgoing "incurred in gaining or producing" his assessable income, or was it an outgoing necessarily incurred in carrying on a business? I think not ... The expenditure would have been incurred in getting, not doing, work as an employee. It would come at a point too soon to be properly regarded as incurred in gaining assessable income. ... moneys spent to obtain a new employment are not allowable deductions for income tax purposes under s. 51 [Now section 8-1 of ITAA 1997].'
In your case, you sought a guarantee of employment in the new position. The legal expenses you incurred were in relation to drawing up a new agreement with your former employer relating to your employment. As with Maddalena's case, your expenses relating to obtaining a new employment agreement are considered to be at a point too soon. Consequently, no deduction is allowable for legal expenses.
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