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Edited version of your written advice
Authorisation Number: 1012722587193
Ruling
Subject: WRE - deductibility of legal expenses
Question 1
Are you entitled to claim a deduction for legal expenses you incurred?
Answer
No.
This ruling applies for the following period:
Year ended 20 June 2014
The scheme commences on:
20 June 2013
Relevant facts and circumstances
Your employment as terminated and you were paid the equivalent of X weeks base salary plus salary entitlements.
You lodged an application to Fair Work Australia (FWA) to deal with a General Protection Dispute (GPD) against your employer.
You sought to claim the following amounts:
• Damages
• Past and future economic loss
• Penalties in accordance with the Fair Work Act
• Costs
You incurred legal expenses in the settlement of the dispute.
Relevant legislative provisions
Income Tax Assessment Act 1997 (ITAA 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, or relate 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, which examines the deductibility of legal expenses in certain situations, states:
If the legal action goes beyond a claim for a revenue item such as wages, and constitutes an action for breach of the contract of employment where the essential character of the advantage sought relates to an enduring advantage that is of a capital nature, the legal costs would not be deductible. For example, legal expense relating to an action for damages for wrongful dismissal are not deductible.
In your case, you incurred costs in settling a general protection dispute against your employer following your termination, where you sought to claim damages for breaches under your employment contract and the Fair Work Act 2009, as well as costs.
The legal action you sought is considered capital in nature; as such the legal expenses you incurred in seeking this payment are also capital in nature. Accordingly, you are not entitled to a deduction for your legal expenses.