| Disclaimer This edited version has been archived due to the length of time since original publication.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 private advice
Authorisation Number: 1012677444612
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 dismissed from your employer.
You took legal action for unfair dismissal and were successful in obtaining an employment termination payment (ETP).
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 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.
The nature or character of expenses follows the advantage that is sought to be gained by incurring the expenses (Hallstroms Pty Ltd v. FC of T (1946) 72 CLR 634; (1946) 8 ATD 190). 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 breach of a taxpayer's contract of employment, for example, an action for damages for wrongful dismissal, are capital in nature and not deductible (Taxation Determination TD 93/29 Income tax: if an employee incurs legal expenses recovering wages paid by a dishonoured cheque, are these legal expenses an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997?).
ETP's, 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 instigated action against your previous employer claiming unfair dismissal and you sought a termination payment. As stated above, expenses relating to damages for wrongful dismissal are considered to be capital in nature.
Furthermore, although the ETP may be included in the assessable income, the ETP retains its character as a capital receipt.
As the legal expenses were incurred in gaining a capital sum, they will also be of a capital nature and are therefore not deductible.