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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 2011
The scheme commenced on
1 July 2010
Relevant facts
You became ill when working for your employer which resulted in you being absent from your workplace for approximately three months.
You sought treatment and returned to work when you were able to do so.
You kept your employer informed or your condition and progress.
You made an appointment with the manager.
At this meeting, you were dismissed as you were deemed to be unfit to work. The dismissal took effect at the end of that week.
You took legal action for unfair dismissal seeking reinstatement.
Your employer decided not to pursue the fair work case and reinstated you.
You were reimbursed your normal wages that you would have earned had you not been terminated, less the payment you received for unused annual and long service leave.
You incurred legal costs.
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 a loss or outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature or relates to the earning of exempt income.
In determining whether a deduction for expenses incurred in relation to your unfair dismissal claim is allowable under section 8-1 of the ITAA 1997, the nature of the expenses must be considered.
The nature or character of expenses follows the advantage that is sought to be gained by incurring the expenses (Hallstroms Pty Ltd v. FC of T (1946) 72 CLR 634; (1946) 8 ATD 190). 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.
The Commissioner of Taxation considers that expenses incurred in relation to an action for breach of a taxpayer's contract of employment, for example, an action for damages for wrongful dismissal, are capital in nature and not deductible (Taxation Determination TD 93/29).
In your case, you instigated action against your employer citing that you had been unfairly dismissed and sought reinstatement. As stated above, these expenses are considered to be capital in nature and as such are not deductible.