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Edited version of your private ruling
Authorisation Number: 1012548717857
Ruling
Subject: Legal fees and travel expenses
Question 1
Are you entitled to a deduction for legal expenses?
Answer
No
Question 2
Are you entitled to a deduction for accommodation and travel expenses for you and your spouse?
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 retrenched by your employer after you told them you had a medical condition.
You took legal against your former employer.
At the time you were living in City A.
The matter was settled and you received a payment.
As you had moved interstate, you had to fly back to City A for the proceedings.
Your spouse accompanied you as you needed help and emotional support.
You have incurred legal, accommodation and travel expenses in the pursuit of your claim.
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 a loss or outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature or relates to the earning of exempt income.
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.
Taxation Determination TD 93/29 states that expenses incurred in relation to an action for breach of a taxpayer's contract of employment, for example, an action for damages for wrongful dismissal, are capital in nature and not deductible.
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.
In your case you have incurred legal expenses to take action against your former employer. The payment that you received is considered an ETP and is capital in nature and consequently the legal expenses incurred in obtaining the ETP are also capital in nature.
Accordingly, no deduction is allowable under section 8-1 of the ITAA 1997 for the legal expenses you incurred in pursuing this payment.
The accommodation and travel expenses you and your spouse have incurred are also not deductible under section 8-1 of the ITAA 1997.