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Ruling
Subject: Legal expenses
Question
Are you entitled to a deduction for legal expenses incurred in defending a claim against an employer?
Answer
No
This ruling applies for the following period:
Income year ended 30 June 2011
The scheme commences on:
1 July 2010
Relevant facts and circumstances
Due to a code of conduct charge, your employer terminated your employment with payment of any outstanding accruals being paid to you.
You then commenced legal proceedings for unfair dismissal.
You attended a reconciliation meeting with your lawyer, your employer and a relevant authority to resolve the allegations in question.
As of a result of the hearing, the matter was not resolved.
You have provided a list of the legal expenses that you have paid for this action.
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, or relate to the earning of exempt income.
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.
Generally, legal expenses incurred in an unfair dismissal action (seeking reinstatement and/or damages) are of a capital nature and therefore, not deductible.
Paragraph five of the Taxation Determination TD93/29 states:
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.
In your case, the legal expenses you incurred were all in relation to defending a code of conduct charge within the terms and conditions of your employment, against your employer which resulted in your dismissal. Your legal costs were all capital in nature and therefore, in accordance with the Commissioner's view expressed in TD 93/29, are not deductible under section 8-1 of the ITAA 1997.