Romanin v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (WAD 19/2008)
Judgment date: 16 October 2008
Date published: 11 January 2011
Decision outcome: Adverse

Summary of decision:
Outlines the Tax Office's response to this case which concerned whether legal expenses incurred in the conduct of proceedings in an industrial tribunal to receive a payment in lieu of termination notice is deductible under section 8-1 ITAA 1997.

Overview of facts:
The taxpayer claimed a deduction of $283,565.14 under section 8-1 of the ITAA 1997 for legal expenses incurred by him in the 2000-04 income years. | The legal expenses were incurred in proceedings the taxpayer commenced before the Industrial Relations Commission of NSW ('IRC') seeking an order that 12 months' pay in lieu of notice was fair after his employment was terminated on seven days notice. | The IRC found that it was fair that the taxpayer be paid the total value of his remuneration package for 12 months' in lieu of notice, less any earnings actually achieved by the taxpayer during that period, plus interest. The taxpayer received $202,829.90. Of the original award of $142,476.49, $40,000 was deposited into a superannuation fund and $102,476.49 was returned and assessed as an eligible termination payment. Interest of $60,353.41 was also assessed as ordinary income. | The IRC ordered the employer to pay an amount to be agreed with the taxpayer in respect of his legal expenses. The employer paid the taxpayer the agreed amount of $210,000 in the 2005 income year. | Issues decided by the Federal Court | McKerracher J held that: 1. The payment for legal expenses was deductible under section 8-1 of the ITAA 1997 because: • The proceedings were undertaken to enforce an entitlement to income (not to compensation or damages) that was contractually owed to the taxpayer (paragraphs 41 and 52). • The character of the payment received by the taxpayer was of an income and not of a capital nature. The amount received was described in the orders pursuant to the IRC's judgment as remuneration, was computed by reference to his entitlement to income, was set off against other income actually earned, and was financial reward for exertion that would have been carried out had his employment not been (invalidly) terminated (paragraph 56). 2. The taxpayer could not make a full claim for the deductibility of the payment without also allowing for the receipt of a contribution for his costs but there was no evidence of any receipt in the 2004 year. The receipt is a matter to be addressed in the subsequent year (paragraph 57). 3. The receipt of the award of $142,476.49 was income and correctly assessed as an eligible termination payment (paragraph 42). | 1. The payment for legal expenses was deductible under section 8-1 of the ITAA 1997 because: • The proceedings were undertaken to enforce an entitlement to income (not to compensation or damages) that was contractually owed to the taxpayer (paragraphs 41 and 52). • The character of the payment received by the taxpayer was of an income and not of a capital nature. The amount received was described in the orders pursuant to the IRC's judgment as remuneration, was computed by reference to his entitlement to income, was set off against other income actually earned, and was financial reward for exertion that would have been carried out had his employment not been (invalidly) terminated (paragraph 56). 2. The taxpayer could not make a full claim for the deductibility of the payment without also allowing for the receipt of a contribution for his costs but there was no evidence of any receipt in the 2004 year. The receipt is a matter to be addressed in the subsequent year (paragraph 57). 3. The receipt of the award of $142,476.49 was income and correctly assessed as an eligible termination payment (paragraph 42). | • The proceedings were undertaken to enforce an entitlement to income (not to compensation or damages) that was contractually owed to the taxpayer (paragraphs 41 and 52). • The character of the payment received by the taxpayer was of an income and not of a capital nature. The amount received was described in the orders pursuant to the IRC's judgment as remuneration, was computed by reference to his entitlement to income, was set off against other income actually earned, and was financial reward for exertion that would have been carried out had his employment not been (invalidly) terminated (paragraph 56).

Issues decided:
McKerracher J held that: 1. The payment for legal expenses was deductible under section 8-1 of the ITAA 1997 because: • The proceedings were undertaken to enforce an entitlement to income (not to compensation or damages) that was contractually owed to the taxpayer (paragraphs 41 and 52). • The character of the payment received by the taxpayer was of an income and not of a capital nature. The amount received was described in the orders pursuant to the IRC's judgment as remuneration, was computed by reference to his entitlement to income, was set off against other income actually earned, and was financial reward for exertion that would have been carried out had his employment not been (invalidly) terminated (paragraph 56). 2. The taxpayer could not make a full claim for the deductibility of the payment without also allowing for the receipt of a contribution for his costs but there was no evidence of any receipt in the 2004 year. The receipt is a matter to be addressed in the subsequent year (paragraph 57). 3. The receipt of the award of $142,476.49 was income and correctly assessed as an eligible termination payment (paragraph 42). 1. The payment for legal expenses was deductible under section 8-1 of the ITAA 1997 because: • The proceedings were undertaken to enforce an entitlement to income (not to compensation or damages) that was contractually owed to the taxpayer (paragraphs 41 and 52). • The character of the payment received by the taxpayer was of an income and not of a capital nature. The amount received was described in the orders pursuant to the IRC's judgment as remuneration, was computed by reference to his entitlement to income, was set off against other income actually earned, and was financial reward for exertion that would have been carried out had his employment not been (invalidly) terminated (paragraph 56). 2. The taxpayer could not make a full claim for the deductibility of the payment without also allowing for the receipt of a contribution for his costs but there was no evidence of any receipt in the 2004 year. The receipt is a matter to be addressed in the subsequent year (paragraph 57). 3. The receipt of the award of $142,476.49 was income and correctly assessed as an eligible termination payment (paragraph 42). • The proceedings were undertaken to enforce an entitlement to income (not to compensation or damages) that was contractually owed to the taxpayer (paragraphs 41 and 52). • The character of the payment received by the taxpayer was of an income and not of a capital nature. The amount received was described in the orders pursuant to the IRC's judgment as remuneration, was computed by reference to his entitlement to income, was set off against other income actually earned, and was financial reward for exertion that would have been carried out had his employment not been (invalidly) terminated (paragraph 56).

ATO view of decision:
The Commissioner lodged an appeal with the Full Court against his Honour's decision, but later decided to withdraw the appeal after further considering the correctness of the decision. | 1. The taxpayer was entitled to a deduction under section 8-1 for the legal expenses he incurred in this case because the Court found that the occasion of the expenditure was the enforcement of his contractual entitlement as an employee to income (in the form of payment in lieu of notice). | 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. | An employee may be paid an amount in lieu of notice of termination of his or her employment in many ways (see Delaney v Staples [1992] 1 All ER 944 at 946). The deductibility of legal expenses incurred in obtaining such a payment will depend upon the particular circumstances of each case. | This case can be distinguished from cases in which legal expenses are incurred in seeking compensation for loss of employment, such as in an action for wrongful dismissal or loss of office (Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215) where the advantage sought is of a capital nature. In such cases, the legal expenses are of a capital nature, even if the amount awarded is calculated by reference to unpaid salary or lost income, or is assessable as statutory income. | The payment to the taxpayer in respect of his legal costs is assessable to him in the 2005 income year either as ordinary income or as an assessable recoupment under subdivision 20-A of the ITAA 1997.

Administrative treatment:
No further Administrative treatment is necessary.

Legislative references: Income Assessment Tax Act 1997 (Cth) 8-1
Case references: Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation [1935] HCA 81 54 CLR 295 Federal Commissioner of Taxation v Day (2007) 164 FCR 250 67 ATR 936 2007 ATC 5426 Commissioner of Taxation v Day [2008] HCA 53 2008 ATC 20-064 70 ATR 14 Federal Commissioner of Taxation v Payne [2001] HCA 3 202 CLR 93 2001 ATC 4027 46 ATR 228 Fletcher v Federal Commissioner of Taxation [1991] HCA 42 173 CLR 1 22 ATR 613 91 ATC 4950 Le Grand v Commissioner of Taxation (2002) 124 FCR 53 2002 ATC 4907 51 ATR 139 Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation [1949] HCA 15 78 CLR 47 Sun Newspapers Limited v Federal Commissioner of Taxation 61 CLR 337
Subject references: Deductions Legal expenses Capital outgoings Eligible termination payment Assessable Recoupment