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Edited version of your written advice
Authorisation Number: 1012690217951
Ruling
Subject: Legal expenses
Question
Are you entitled to a deduction for legal expenses incurred to receive an employment termination payment?
Answer
No.
This ruling applies for the following period:
Year ended 30 June 2014
The scheme commences on:
1 July 2013
Relevant facts and circumstances
You were suspended from your employment.
You were unpaid for a period of time and had to take legal action.
You incurred legal fees.
You settled your claim and received an employment termination payment.
You no longer work for the employer.
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 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, or relate to the earning of exempt income.
For legal expenses to constitute an allowable deduction it must be shown that they were incidental and relevant to the production of the taxpayer's assessable income (Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431).
The nature of the expenditure must also be considered (Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 8 ATD 190). The nature or character of the legal expense 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 expense incurred in gaining the advantage will also be of a capital nature.
An employment termination payment (ETP) is defined as a payment made in respect of a taxpayer in consequence of the termination of any employment of the taxpayer, and includes bona fide redundancy payments and payments made under commercial separation agreements.
An ETP is capital in nature because it is a payment made to compensate for the loss of the employment position (Case Y24 91 ATC 268; AAT Case 6942 (1991) 22 ATR 3184).
ETPs are subject to special tax treatment that may result in some or all of the amounts being included in 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 assessable income.
As stated above, if the advantage to be gained from incurring legal expenses is of a capital nature, then the expense incurred in gaining the advantage will also be of a capital nature.
In your case, you incurred legal expenses which resulted in your receipt of an employment termination payment. As the ETP was paid to compensate for the loss of your employment position, it is considered to be capital in nature. For this reason, the legal expenses at issue would also be considered to be capital in nature. The legal expenses are not, therefore, deductible under section 8-1 of the ITAA 1997.