Disclaimer
This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your private ruling

Authorisation Number: 1012632298830

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 2014

The scheme commenced on

1 July 2013

Relevant facts

You were employed from mid-20XX until you were terminated in mid-20YY.

You lodged an application to deal with a general protections dispute before the Fair Work Commission.

You received a settlement sum comprising half for economic loss and half for non-economic loss.

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 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.

In determining whether a deduction for legal expenses is allowed, 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. 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.

The Commissioner of Taxation considers that expenses incurred in relation to an action for damages for wrongful dismissal, are capital in nature and not deductible (Taxation Determination TD 93/29).

Payments made in consequence of termination of employment are treated as employment termination payments (ETP) and 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 incurred the legal expenses claiming unfair dismissal which resulted in the receipt of an ETP.

As previously stated, legal expenses relating to unfair dismissal are capital in nature. Furthermore, although the ETP may be included in the assessable income, the ETP retains its character as a capital receipt.

The legal expenses incurred are of a capital nature and are therefore not deductible.