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Edited version of your written advice
Authorisation Number: 1051304607895
Date of advice: 3 November 2017
Ruling
Subject: Deductibility of Legal Fees
Question
Are you entitled to a deduction for legal expenses incurred in an unfair dismissal claim against your former employer?
Answer
No
This ruling applies for the following period:
Year ended 30 June 2017
The scheme commences on:
1 July 2016
Relevant facts and circumstances
You took action against your former employer for unfair dismissal.
You engaged legal practitioners to assist you in taking the matter to the Fair Work Commission. Your claim against your former employer included:
● Loss of wages
● Damage to reputation
● Legal fees
You incurred legal expenses for representation in this case.
You have provided copies of invoices for your legal fees which are categorised as ‘Professional Services’.
You decided not to proceed with this legal 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.
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 expenses in taking legal action against your employer for unfair dismissal. Your legal action has gone beyond a claim for revenue hence the legal costs are not deductible, because they are capital in nature.
As your legal costs were all capital in nature and therefore in accordance with Commissioners view expressed in TD 93/29 are not deductible under section 8-1 of the ITAA 1997.