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Edited version of your private ruling
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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 2008
Year ended 30 June 2009
The scheme commenced on
1 July 2007
Relevant facts
You were employed.
You were instantly dismissed for what your employer considered to be a breach of an Occupational Health and Safety issue.
You sought legal advice regarding your dismissal which you considered to be unfair.
The court ordered that you be reinstated.
Relevant legislative provision
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).
In your case, you incurred the legal expenses relating to a claim for unfair dismissal. As the legal expenses were incurred in gaining a capital asset, they will also be of a capital nature and are therefore not deductible.