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Edited version of your private ruling
Authorisation Number: 1012510635231
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 2013
The scheme commenced on
1 July 2012
Relevant facts
You were employed by an entity under an employment contract.
You were formally notified of the termination of your employment with the entity.
You received legal advice to submit a case for an unfair dismissal remedy.
The entity agreed to pay you an amount which was considered a redundancy.
Both parties agreed that the payment included the full amount that the entity owed you whether for salary, wages or other remuneration, leave entitlements, payment in lieu of notice, severance pay or anything else connected with the proceedings, the employment and the termination.
You incurred legal expenses.
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 or 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 under section 8-1 of the ITAA 1997, 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. For example, 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. Therefore, to determine the deductibility of the legal expenses, it is necessary to consider the reason for which expenses were incurred.
Taxation Determination TD 93/29 which considers the deductibility of legal expenses states at paragraph 5:
...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, the legal costs would not be deductible because they are capital in nature. For example, legal expenses relating to an action for damages for wrongful dismissal are not deductible.
In your case, after your employment was terminated, you took legal action for unfair dismissal. In accordance with TD 93/29, legal expenses relating to an action for wrongful dismissal are not deductible as they are of a capital nature. Consequently, the legal expenses you incurred are not an allowable deduction under section 8-1 of the ITAA 1997.