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Edited version of your written advice
Authorisation Number: 1013082513590
Date of advice: 1 September 2016
Ruling
Subject: Legal expenses
Question 1
Are you entitled to a deduction for legal expenses associated with seeking legal advice regarding a larger employment termination payment (ETP) after dismissal from an employment position?
Answer
No.
This ruling applies for the following period:
Year ending 30 June 2016.
The scheme commences on:
1 July 2015.
Relevant facts and circumstances
You were employed as a principal on a contract.
Your employment was terminated before the contract was due.
You were offered an ETP.
You obtained legal representation to assist with negotiations for a larger ETP.
When the matter was resolved a final higher ETP amount was offered.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
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.
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, domestic or private nature, then the expenses incurred in gaining the advantage will also be of a capital, domestic or private nature.
ETP's 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 ETP's are capital in nature, any legal expenses associated with obtaining the ETP are also capital in nature and not deductible.
The Commissioner acknowledges that in your private ruling request you refer to Taxation Ruling TR 2000/5 which relates to costs incurred in preparing and administering employment agreements The ruling states that certain costs incurred by an employee are an allowable deduction, those costs being:
• costs of drawing up an employment agreement with an existing employer
• costs of settling disputes arising from an existing employment agreement
• costs of changing conditions of an existing employment agreement
• costs of renewing or extending a fixed term agreement where there is a provision allowing for renewal or extension.
In your case, the legal expenses incurred were for the negotiation to increase your ETP payment, not the negotiation of conditions of employment. Therefore TR 2000/5 is not relevant to your circumstances.
You have also referred to the High Court's decision in Spriggs v. Federal Commissioner of Taxation; Riddell v. Federal Commissioner of Taxation (2009) 239 CLR 1; [2009] HCA 22 ('Spriggs case). This High Court decision permits sportspeople to claim management fees incurred as a deduction due to the fees being directly linked to the taxpayers earning of assessable income. The management fees were incurred as part of negotiating the conditions of new and ongoing employment contracts. As your legal expenses did not relate to your employment conditions the principles contained within Sprigg's case cannot be applied to your situation.
The legal expenses you incurred were for the negotiation to increase your ETP payment, not the negotiation of your conditions of employment. As your legal expenses relate to items which were capital in nature, the legal expenses are also considered to be capital in nature. Therefore the legal expenses associated with the ETP are not deductible under section 8-1 of the ITAA 1997.