Private ruling: legal expenses
Published: May 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to a deduction for legal expenses? | A1: No

Relevant facts and circumstances: You were employed in a role with an organisation. You believe that many breaches of your employment contract occurred and that you were only being kept on as your employer did not want to terminate your services for financial reasons. You engaged the legal services in relation to the termination of employment to ensure all income due to you was received as per his employment contract. You originally requested the following payment: · pay in lieu of notice · severance pay · accrued leave entitlements plus outstanding salary An agreement was reached between you and your employer in which your employment was to cease and you were to receive a negotiated down payment. Tax was deducted from the payment.

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 (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. For legal expenses to constitute an allowable deduction it must be shown that they were incidental and relevant to the production of the taxpayer's assessable income ( Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431). The nature of the expenditure must also be considered ( Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 8 ATD 190). The nature or character of the legal expense 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 expense incurred in gaining the advantage will also be of a capital nature. An Eligible Termination Payment (ETP) is defined as a payment made in respect of a taxpayer in consequence of the termination of any employment of the taxpayer, and includes bona fide redundancy payments and payments made under commercial separation agreements. An ETP is capital in nature because it is a payment made to compensate for the loss of the employment position ( Case Y24 91 ATC 268; AAT Case 6942 (1991) 22 ATR 3184). ETPs are subject to special tax treatment that may result in some or all of the amounts being included in 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 assessable income. As stated above, if the advantage to be gained from incurring legal expenses is of a capital nature, then the expense incurred in gaining the advantage will also be of a capital nature. In your case you incurred legal expenses to secure a termination payment from your employer. The payment sought by you is an ETP and was paid to compensate for the loss of your employment position, as such it is considered to be capital in nature. For this reason, the legal expenses at issue would also be considered to be capital in nature. The legal expenses are not, therefore, deductible under section 8-1 of the ITAA 1997.

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