Edited version of your private ruling

Authorisation Number: 1012354637848

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

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 20XX

The scheme commenced on

1 July 20XX

Relevant facts

You worked for your employer for a large number of years.

Your employer gave you an unfavourable performance review which you disputed.

Your employer took no steps to deal with the unfavourable review thus causing you significant distress and anxiety.

On doctor's orders, you took sick leave and your employer paid you for X months sick leave.

After the X month's paid sick leave, your employer ceased paying you sick leave on the grounds that you had exhausted your sick leave entitlement.

Your employer wrote to you threatening to regard your contract of employment as being terminated. They later wrote to you purporting to treat your employment as having ended by reason of frustration of the contract of employment arising from the absence on sick leave.

Your employer terminated your employment and paid you your accrued statutory entitlements.

You took legal action against your employer as you believed you had been discriminated against.

You also sought, among other things, to gain payment of sick leave for the period you were not paid while you were off work sick.

You agreed to a settlement amount and agreed that the payment included the full amount owed to you, whether for salary, wages or other remuneration, leave entitlements, payment in lieu of notice, severance pay, or anything else connected with the complaint, the employment or cessation of the employment.

You made a claim and were successful in obtaining a payment for total and temporary disability (TTD).

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 or are necessarily incurred in carrying on a business for the purpose of 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, or a provision of the ITAA 1997 prevents it.

In determining whether a deduction for legal expenses is allowed, the nature of the expenditure must be considered. 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.

Employment termination payments (ETP), which are considered to be capital payments, are 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.

Alternatively, the payment you accepted was for the full amount owed to you, whether for salary, wages or other remuneration, leave entitlements, payment in lieu of notice, severance pay, or anything else connected with the complaint, the employment or cessation of the employment.

Even if your employer had treated this payment as an undissected lump sum, the payment would still have been capital and a deduction not allowable for the legal expenses.

As the legal expenses were incurred in gaining a capital sum, they will also be of a capital nature and are therefore not deductible.

Total and temporary disability payment

We accept that you may not have been aware of your entitlement to the TTD payment had you not taken the legal action. However, in this case, your employer advised the AHRC, who advised you, that you may have been entitled to the TTD payment. As such, no amount of legal expenses can be considered as directly related to obtaining this payment.