Private ruling: Legal expenses
Published: October 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a deduction for a portion of your legal expenses? | A1: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 allows a deduction for a loss or outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature or relates to the earning of exempt income. In determining whether a deduction for legal expenses is allowed, the nature of the expenditure must be considered. 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 nature, then the expenses incurred in gaining the advantage will also be of a capital nature. The nature or character of expenses follows the advantage that is sought to be gained by incurring the expenses ( Hallstroms Pty Ltd v. FC of T (1946) 72 CLR 634; (1946) 8 ATD 190). If the advantage to be gained is of a capital nature, then the expenses incurred in gaining the advantage will also be of a capital nature. You incurred legal expenses in order to obtain unpaid bonuses which resulted in you gaining assessable income. Thus, there is a clear connection between the assessable income and the expense. You also incurred legal expenses relating to the cancellation of the secondment which resulted in you incurring break fees for the lease of your rented property. Expenses relating to accommodation are private expenses and not deductible. Therefore, legal expenses relating to the accommodation are also private. Alternatively, the action resulted in you obtaining an ETP. ETP, which are considered to be capital payments, are subject to special tax treatment that may result in some or the entire amount being included in the taxpayer's assessable income. However the fact that a capital payment is specifically brought to account as assessable income will not change the nature of the payment. An amount that is capital in nature will remain capital notwithstanding that it is specifically included in the assessable income of the taxpayer. Furthermore, although the ETP may be included in the assessable income, the ETP retains its character as a capital receipt. In your case, your legal expenses which relate to obtaining the unpaid bonuses are deductible as they relate to producing assessable income. However, the expenses relating to either the break of the lease or obtaining the ETP are not deductible as they are capital or private in nature. You can apportion the legal expense in a fair and reasonable manner based on the time spent for each component.

Relevant facts: You were seconded to work overseas for a period of approximately 18 months. | The secondment was cancelled part way through the period. | You had signed a lease on a house for the period you were on secondment and would have needed to break the lease. | Your employer would not make the payments required to break the lease. | You were successful in getting unpaid bonuses and also an Employment Termination Payment (ETP).