Edited version of your written advice

Authorisation Number: 1012998457177

Date of advice: 20 April 2016

Ruling

Subject: Legal expenses to seek reinstatement of employment

Question

Are you eligible to claim a deduction for legal expenses incurred with regard to your termination of employment?

Answer

No

This ruling applies for the following period

Year ended 30 June 2015

The scheme commences on

1 July 2014

Relevant facts and circumstances

Your employment was terminated by your employer. You received pay in lieu of notice. At the time of your dismissal, you were in line to receive employer share options and bonuses related to your performance and that of your particular workplace.

Your legal representative lodged a claim with the Fair Work Commission.

The remedy sought as stated on the application was reinstatement.

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 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 expenses incurred in relation to your unfair dismissal claim is allowable under section 8-1 of the ITAA 1997, the nature of the expenses must be considered.

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.

For legal expenses to constitute an allowable deduction, it must be shown that they were incidental or 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 deductibility of legal expenses incurred in relation to an action for unfair dismissal was considered in Case L26 79 ATC 126; 23 CTBR (NS) Case 32 (Case L26). In that case, the taxpayer was employed as a music teacher by the Commonwealth Teaching Service. She was dismissed from her employment as a school teacher on the ground that she could not control classes. She was unsuccessful in her appeal to the Disciplinary Appeal Board against her dismissal.

The taxpayer claimed a deduction for her legal expenses in relation to the appeal. It was held that although the expenditure was a necessary step prior to regaining income from the employment from which the taxpayer had been dismissed; it was not expenditure incurred in the course of gaining or producing such income. Thus, the expenditure was not deductible.

The decision in the above case is confirmed in Taxation Determination TD 93/29 which states that legal expenses relating to an action for wrongful dismissal are not deductible. The expenses are capital in nature and also are not incurred in order to gain an income amount.

In your case, you began Legal proceedings for being unfairly dismissed from your employment. You sought to be reinstated to your former position. As stated above, these expenses are considered to be capital in nature and as such, are not deductible