Edited version of your private ruling

Authorisation Number: 1012605646368

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 commences on

1 July 2012

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: 

• the application for private ruling and

• the documents provided with the application for private ruling.

You were forced to resign from your employment.

Your employer withheld accrued leave entitlements in lieu of sufficient notice being given.

You sought legal advice and services from a law firm. The firm lodged an application for unfair dismissal remedy on your behalf.

This document states that you were seeking an award of monetary compensation for your unfair dismissal.

The dispute was resolved and you received a payment which will be taxed as an Employment Termination Payment (ETP).

You have incurred legal expenses in relation to this issue.

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) provides that a loss or an outgoing is an allowable deduction if it is incurred in producing assessable income unless that loss or outgoing is capital or of a 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). The nature or character of the legal expenses follows the advantage which 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 where legal expenses are incurred by an employee (or a former employee) in pursuing a legal action against his/her employer (or former employer) to recover amounts owing of a revenue nature such as wages, the legal expenses are an allowable deduction.

Paragraph 5 of TD 93/29 provides the Commissioners view on the deductibility of legal expenses incurred in relation to a wrongful dismissal action.  This paragraph states that the expenses:

• will be deductible to the extent to which they relate to a claim for items of a revenue nature such as unpaid salary or wages; but

• will not be deductible to the extent to which they relate to a claim for items of a capital nature such as damages for breach of contract of employment or for damages for wrongful dismissal.

In your case, you lodged an application for unfair dismissal remedy and were seeking an award of monetary compensation for unfair dismissal. The dispute was resolved and you received a settlement payment from your employer by way on an ETP.

The money you received as an ETP is considered to be for compensation for the loss of your employment position. As this payment relates to the loss of the expectation of continuity of service, the payment is considered to be capital in nature (Case Y24 91 ATC 268; AAT Case 6942 (1991) 22 ATR 3184).

ETP's are subject to special tax treatment that may result in some or the entire amount being included in your 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 your assessable income.

Therefore, as the ETP you received is capital in nature, the legal expenses you incurred to obtain the payment are also capital in nature. Accordingly, no deduction is allowable under section 8-1 of the ITAA 1997 for the legal expenses you incurred.