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Edited version of your written advice
Authorisation Number: 1051325636918
Date of advice: 10 January 2018
Subject: Legal expenses deduction
Question
Are you entitled to a deduction for legal expenses?
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 were employed by Company A.
You attended a meeting with Company A representatives and were advised that you had breached the code of conduct and charter values.
You attended a second meeting and were informed that your employment with Company A was terminated immediately.
Following the termination, you engaged Lawyers to assist you in taking the matter to the Fair Work Commission.
You lodged an unfair dismissal application with the Fair Work Commission.
The application eventually resulted in a settlement.
You are now employed by Company B.
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.
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).
Also, in determining whether a deduction for legal expenses is allowed under section 8-1 of the ITAA 1997, the nature of the expenses 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 were dismissed by your employer following a conduct and charter values charge. You lodged an unfair dismissal application with the Fair Work Commission claiming that you had been unfairly dismissed and incurred legal expenses. Following conciliation with Company A and the Fair Work Commission, your employment was not reinstated; Company A agreed not to list your name and to provide you with a statement of service indicating the length of your employment, your role and key duties so you could continue working within the industry.
Accordingly, you are not entitled to a deduction for legal expenses under section 8-1 of the ITAA 1997 as they are capital in nature.