Edited version of private advice

Authorisation Number: 1051581601091

Date of advice: 17 September 2019

Ruling

Subject: Work related expenses - legal expenses

Question:

Are you entitled to a deduction for all your legal expenses?

Answer:

No

Question:

Are you entitled to a deduction for the legal expenses incurred in respect of pursuing your compensation for lost wages?

Answer:

Yes

This ruling applies for the following period:

Year ended 30 June 2019

The scheme commenced on:

1 July 2018

Relevant facts and circumstances

You were employed by Company A and were dismissed in Summer 2018.

You engaged legal practitioners to assist you in taking legal action against the dismissal to the Fair Work Commission.

Your claims against your former employer included-

·   Reinstatement

·   Continuity of service

·   Compensation including for lost compulsory superannuation

Your action was settled with an agreement under which you received an amount of $X as a gross payment which was paid as an employment termination payment. This payment was approximately equal to Y week's wages (without a superannuation component).

You incurred legal expenses for representing you in this case. You wish to claim your legal fees and associated costs as a deduction. The total you wish to claim is $Z.

You have provided copies of invoices from solicitors for your legal fees which are categorised as various work associated with this claim.

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 Romanin v. FC of T 2008 ATC 20-055; [2008] FCA 1532; 73 ATR 760 (Romanin) the court considered the deductibility of legal expenses incurred by the taxpayer for proceedings at the Industrial Relations Commission. In the proceedings, the taxpayer argued that an employment contract existed where they were entitled to 12 months' notice, or a payment in lieu of this notice. The employer had denied such a contract existed and had given seven days' notice.

The proceedings found in favour of the taxpayer and the employer was ordered to pay them the total value of the employment package for the period of 12 months less any salary and other earnings that they had earned in alternative employment during the 12 months following the termination of employment.

The legal expenses were found not to be capital in nature because the character of the advantage which the taxpayer sought in bringing the proceedings was on revenue account, namely receipt of his contractual entitlement to salary he would have received had he been given 12 months' notice.

Legal expenses incurred to recover income payments such as were at issue in Romanin - that is, salary that would have been derived during the notice of termination period, had it been given - will be deductible, even if the receipt was paid as a lump sum and subject to assessment as an employment termination payment.

In your case, unlike Romanin, you are not seeking payment in lieu of notice but are seeking reinstatement, continuity of service and compensation for lost wages. Reinstatement and continuity of service are capital in nature. Therefore, the legal expenses you incur in pursuing these remedies are also capital in nature and consequently not deductible.

Given this you will be obliged to determine an appropriate apportionment of your legal expenses as to which part of these expenses relate to the remedies for reinstatement and continuity of service and to not claim this portion of the expenses as they relate to a capital payment. The remainder of the legal expenses will relate to claims that are revenue in nature and hence deductible.