Private ruling: Deductibility of legal fees
Date of advice: 3 December 2025
Published: 27 January 2026
Ruling period: Period ended DD MM YY
Date scheme commenced: DD MM YY

Ruling: Q1: Are you able to claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for legal fees incurred in fighting an unfair dismissal case following your termination of employment? | A1: No.

Relevant facts and circumstances: You were employed on a full-time basis by Employer A, in Position A. You worked in the company's office in City A. You commenced employment with the company on DD MM YY. On DD MM YY you were made redundant. You made an application to the Fair Work Commission for unfair dismissal. You submitted to the Commission that your dismissal was a result of your request for a wage review and two applications made by you to the Fair Work Commission against your employer. You submitted to the Commission that throughout your employment with the company there was no performance appraisal and no adjustment to your pay. You further submitted: • On DD MM YY you were asked to complete a performance appraisal form for the period DD MM YY to DD MM YY but no feedback was provided on completion of the form • On DD MM YY you sent an email to your supervisor requesting a salary increase but received no response • On DD MM YY you became aware of an advertisement for Position A based in the company's office in City B, Country A. The advert reflected your job description plus the additional duties you had advised your manager you were undertaking in an email on DD MM YY. On DD MM YY you filed Application A with the Commission. On DD MM YY staff at your place of employment received an email, following up on a staff meeting held on DD MM YY in which staff cuts were discussed. On DD MM YY you received an email about an increase in your employer's customer intake, which you submitted to the Commission, did not support the reasons for the proposed staff cuts. On DD MM YY you filed an application with the Commission but were dismissed before the scheduled conciliation conference in respect of those claims. On DD MM YY you received an email advising the business was entering phase two of its restructure and that staff would be informed of the outcome by the end of MM YY. On DD MM YY you received an email from an officer of the company in respect of a letter inviting you to a consultation meeting with your manager.to be held on DD MM YY. On DD MM YY you wrote an email to your manager in response to the claims made in the letter, disputing the need for a restructure and identifying your skills and value to the company. On DD MM YY you attended the meeting with your manager alone only to find two other senior officers with the company were attending without your knowledge. At the meeting you addressed your concerns that you were underpaid but received no feedback or response to this. On DD MM YY you received a letter from the parent company of your employer advising it is going to proceed with the proposed restructure and that you would be dismissed at Xpm on DD MM YY. On DD MM YY you received your letter of termination. On DD MM YY you made your application to the Fair Work Commission, alleging that you were unfairly dismissed from your employment with Employer A. The Commission found that your termination of employment was not a genuine redundancy as submitted by your employer. The Commission also found that your dismissal was unfair and that a remedy was to be awarded. Reinstatement was not considered to be an appropriate remedy and the Commission determined that compensation was more suitable. You submitted to the Commission that you had been out of work for XX period of time following your termination. On termination you had been paid a number of week's salary as notice, and a further number of weeks as severance pay. The Commission awarded a further number of weeks of pay to bring your compensation to an equivalent of number of weeks. The number of weeks of pay is an amount of $X gross. Your former employer reported this amount to the Australian Taxation Office as an eligible termination payment.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 82-13

Reasons for decision: Detailed Reasoning - Detailed reasoning: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for a loss or an 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 relate to the earning of exempt income. In determining whether a deduction for legal expenses is allowable, the nature or character of the expenditure must be considered, that is, whether the legal expenses are incurred for a capital or a revenue purpose ( 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. For example, if the advantage to be gained is of a capital nature, then the legal expenses incurred in gaining the advantage will also be of a capital nature and are not deductible. | Detailed Reasoning - Compensation for unfair dismissal: Generally, legal expenses incurred in an unfair dismissal proceeding (seeking reinstatement, damages, or actions) are of a capital nature and therefore, not deductible. Taxation Determination TD 93/29, paragraph 5 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 expense relating to an action for damages for wrongful dismissal are not deductible. Tax Ruling TR 2012/8, paragraph 45 states: Compensation for loss of employment, such as in an action for wrongful dismissal or loss of office, is a capital receipt ( Scott v. Commissioner of Taxation ).[17] Legal costs incurred in seeking such compensation are not deductible because the nature of the advantage sought is capital. This is so, even if the amount of compensation awarded is calculated by reference to unpaid salary or lost income, or is assessable as statutory income. The Courts, Boards and Tribunals have consistently held that the legal expenses incurred by taxpayers in defending themselves against dismissal from their employment are of a capital nature unless they are defending the way they carry out their day-to-day employment duties. This is because: • the legal expenses can be regarded as having been incurred once and for all, and • the advantage sought to be gained is the preservation of the taxpayer's employment. In your circumstances, reinstatement was not considered to be a suitable remedy due to the nature of your relationship with your former employer. The Commission awarded you compensation as a remedy, which is capital in nature and therefore not deductible. | Detailed Reasoning - Redundancy payment: The nature of a redundancy payment was considered in Case Y24 91 ATC 268; AAT Case 6942 (1991) 22 ATR 3184. In that case, it was held that a redundancy payment, being compensation for the loss of the expectation of continuity of service, is a payment that is capital in nature. The payment is made to compensate for the loss of employment position, that is, as compensation for the sterilisation of a capital asset, and thus is capital in nature. Redundancy payments are treated as eligible termination payments and 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. A redundancy payment received by a taxpayer is capital in nature and consequently the legal expenses incurred in seeking the redundancy payment are also capital in nature. Your employer paid your compensation as an eligible termination payment. The legal expenses you incurred in making your claim and receiving this are not deductible as they are expenses of a capital nature.