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Ruling

Subject: Deductibility of legal expenses

Question 1:

Are you entitled to a deduction for self education expenses?

Answer:

No.

Question 2:

Are you entitled to a deduction for legal fees incurred in relation to breach of contract?

Answer:

No.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

You had an employment agreement with your employer which provided remuneration of study fees.

You resigned from your employment.

You were required to pay your former employer back the study fees.

Your former employer took legal action against you to recover the study related costs.

You proceeded to trial and settled out of court.

You were required to pay your former employers legal fees as well as your own fees.

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.

Self-education expenses

The payment for damages (being repayment of self education expenses) to your former employer by you is not related to the earning of assessable income. The payment represents expenditure incurred by you for breaching the terms of the employment contract.

Therefore, the expenditure for damages cannot be said to have been incurred as a self education expense.

Accordingly, the damages paid for breach of employment contract in relation to the self education expense claim is not an allowable deduction under section 8-1 of the ITAA 1997 as it was not incurred in gaining or producing assessable income.

Legal expenses

Taxation Determination TD 93/29 examines the deductibility of costs incurred in taking legal action to recover wages.

Legal expenses are an allowable deduction where a taxpayer is seeking the recovery of wages only.

In deciding whether expenditure has the character of a capital or of a revenue payment the advantage for which the expenditure was incurred must be identified and the manner in which it is to be relied upon or enjoyed must be considered.

Salary or wage income is only assessable when it has been derived and salary and wages are generally derived when they have been received.

However, 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 where the essential character of the advantage sought relates to an enduring advantage that is of a capital nature, the legal costs are not deductible.

In your case you incurred legal costs associated with a dispute arising over your employment contract.

You were taken to court by your former employer for breach of that contract and incurred legal fees.

You are not entitled to a deduction for the legal expenses associated with the breach of your employment contract under section 8-1 of the ITAA 1997 as the legal action did not relate to a claim for a revenue item such as wages, and therefore the expenses were not incurred in the gaining or producing of assessable income.