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Edited version of your written advice
Authorisation Number: 1013091553675
Date of advice: 15 September 2016
Ruling
Subject: Legal expenses - work place dismissal
Question
Are legal costs related to unfair dismissal deductable under section 8-1?
Answer
No. Your legal expenses incurred while defending your unfair dismissal are capital in nature and are not deductible.
This ruling applies for the following periods:
Year ended 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You attended a meeting with your employer and were advised that your position had been made redundant.
You were dismissed with four weeks redundancy payment.
You were advised that you were entitled to 4 weeks' notice at full payment plus four weeks eligible termination payment.
You commenced legal proceedings for unfair dismissal, compensation and employment in any other position available at previous employers company.
You attended a court hearing. You withdrew from court proceedings.
You have provided a list of the legal expenses that you paid for this action.
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.
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 nature, then the expenses incurred in gaining the advantage will also be of a capital nature.
Generally, legal expenses incurred in an unfair dismissal action (seeking reinstatement and/or damages) are of a capital nature and therefore, not deductible.
Paragraph five of Taxation Determination TD93/29 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, the legal costs would not be deductible because they are capital in nature. For example, legal expenses relating to an action for damages for wrongful dismissal are not deductible.
In your case, you incurred legal expenses in relation to a claim for unfair dismissal. The expenses were incurred in seeking reinstatement to your former position and are considered capital in nature. Therefore, you are not entitled to a deduction under section 8-1 of the ITAA 1997 for the costs incurred in seeking reinstatement to your former position.