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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 were employed for approximately one month until you were terminated.
You experienced professional bullying and your incident reports were not acted upon.
You sought legal advice to seek reinstatement and made a claim under the Fair Work Act 2009.
You later sought compensation in lieu of reinstatement.
Under the deed of settlement, you accepted an amount which was treated as an employment termination payment (ETP).
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 (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.
The Commissioner of Taxation considers that expenses incurred in relation to an action for damages for wrongful dismissal, are capital in nature and not deductible (Taxation Determination TD 93/29).
Payments made in consequence of termination of employment are treated as ETP's and 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 firstly to be reinstated and later seeking compensation in lieu of reinstatement and resulted in the receipt of an ETP.
As previously stated, legal expenses relating to unfair dismissal are capital in nature. Furthermore, although the ETP may be included in the assessable income, the ETP retains its character as a capital receipt.
The legal expenses incurred are of a capital nature and are therefore not deductible.