ATO Interpretative Decision

ATO ID 2002/935

Income Tax

Deductibility of a retainer paid to a legal firm
FOI status: may be released
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Status of this decision: Decision Current
CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.


Is an employee taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the cost of a retainer paid to a legal firm for the provision of legal services?


No. An employee taxpayer is not entitled to a deduction under section 8-1 of the ITAA 1997 for the cost of a retainer paid to a legal firm for the provision of legal services.


The taxpayer is an employee.

The taxpayer resigned their union membership. Under this membership the taxpayer would have had access to free or subsidised legal advice and representation.

The taxpayer negotiated an arrangement with a legal firm under which the taxpayer paid the legal firm an amount equal to the amount they were previously paying for their union membership. This payment could be made either as an annual payment or as a regular salary deduction. The taxpayer chose to have regular salary deductions.

In return for this payment the legal firm agreed to provide, if needed, various legal services either free of charge or at a reduced cost.

The legal services to be provided included both employment related services (for example advice on employment contracts) and services of a personal nature (for example drafting a will).

Reasons for Decision

Section 8-1 of the 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.

There are circumstances where a deduction for legal expenses will be allowed to an employee. In determining whether a deduction for legal expenses is allowed under section 8-1 of the ITAA 1997 the nature of the expenditure must be considered (Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; [1946] HCA 34; (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 or private nature, then the expenses incurred in gaining the advantage will also be of a capital or private nature.

The payment or payments made by the taxpayer were in the nature of a retainer which guaranteed the provision of certain legal services should they be needed in the future. The payments did not relate to specific legal services that had been provided. The payment was to guarantee the availability of the legal services should the need for them arise. While the costs involved in obtaining some specific legal services may have a connection with earning the taxpayer's assessable income, these payments have no such connection. The taxpayer has not incurred this expense in order to earn their assessable income, rather the expense is in the nature of a capital expense incurred in order to secure a future benefit unrelated to the taxpayer's day to day activities.

The taxpayer may argue that the payment should be seen as being in lieu of union subscriptions as the union provided access to legal services and the taxpayer has merely found another means to gain access to similar services. However, the deductibility of union fees is not based on the union's provision of legal services.

The deductibility of union fees is discussed in Taxation Ruling TR 2000/7. TR 2000/7 provides at paragraph 6 that subscriptions paid by a person for membership of a trade, business or professional association are deductible where the principal activities of the association are relevant to the gaining or producing of assessable income by the member. Therefore, where the principal activities of the association are negotiating and administering employment agreements and/or providing professional development services the subscription is an allowable deduction to a member who is working in a relevant trade, industry or profession.

Unions generally have as their principal objective the gaining of higher salaries and improved working conditions for members, including negotiating and administering employment agreements, which is relevant to the earning of assessable income by the members.

Unlike a union the legal firm does not provide the taxpayer with assistance in their day to day income producing activities. The principle objective of the legal firm is to provide legal advice if or when required. Thus the payments made by the taxpayer to the legal firm are considered to be too remote from the gaining of the taxpayer's assessable income.

The payments made by the taxpayer to the legal firm cannot be described as an expense incurred by the taxpayer in earning their assessable income. Accordingly, the payments are not deductible under section 8-1 of the ITAA 1997.

Amendment History

Date of Amendment Part Comment
8 October 2015 Reasons for Decision and Case reference Updated case reference.

Date of decision:  26 June 2002

Year of income:  Year ending 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   section 8-1

Case References:
Hallstroms Pty Ltd v. Federal Commissioner of Taxation
   [1946] HCA 34
   (1946) 72 CLR 634
   (1946) 3 AITR 436
   (1946) 8 ATD 190

Related Public Rulings (including Determinations)
Taxation Ruling TR 2000/7

Trade unions & employee associations
Association & membership expenses
Legal expenses

Siebel/TDMS Reference Number:  DW384374/1-78Z6END

Business Line:  Small Business/Individual Taxpayers

Date of publication:  30 September 2002

ISSN: 1445-2782

  Date: Version:
  26 June 2002 Original statement
You are here 8 October 2015 Updated statement