Private ruling: Deductibility of work related legal expenses
Date of advice: 14 February 2017
Published: July 2017
Ruling period: 1 July 2014 to 30 June 20YY | 1 July 2015 to 30 June 20ZZ
Date scheme commenced: 20XX

Ruling: Q1: Is a deduction allowed for the legal expenses incurred defending the action by your former employer? | A1: No

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The Taxpayer was employed by the Company. In 20XX the Company agreed to move the Taxpayer employment to a city. As part of the arrangement, the Company agreed to pay the cost of moving the Taxpayer's furniture and possessions to the city. The Company paid an amount to a third party removalist. The Company also agreed to subsidise the Taxpayer's rent and electricity costs. The Taxpayer's contract with the Company stated that if the Taxpayer left their employment within twelve months the Taxpayer would need to repay the entire amount the Company incurred to relocate the Taxpayer. If the Taxpayer left within two years they would need to repay 50% of the relocation costs. During the second year of the Taxpayer's employment with the Company in the city, as part of a cost cutting scheme the Company attempted unilaterally to make changes to the Taxpayer's employment contract, removing the subsidies. As a consequence of these changes the Taxpayer resigned their job on a date in 20XY, partly on medical advice. The Company began action against the Taxpayer to recover various amounts of money relating to alleged overpayments and relocation costs. As a consequence of this the Taxpayer incurred legal expenses to defend against the action. After negotiation the Company agreed to drop the case, with all parties responsible for their own legal costs. The Taxpayer incurred legal costs of an amount.

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

Reasons for decision: Summary: The Taxpayer is not able to claim a deduction for legal expenses incurred defending the attempt to recover money by their former employer as the expenses were incurred after employment had ceased. In addition, the relocation payments were private and capital in nature and the legal expenses regarding them retain this character. | Detailed Reasoning - Detailed reasoning: 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. For legal expenses to be an allowable deduction, they must be related to earning the taxpayer's assessable income and not be of a capital or private nature. The nature 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 (ie one-off) nature, then the expenses incurred in seeking the advantage will also be of a capital nature. Furthermore, an expense cannot be deductible when it is a private expense. Generally the costs of relocation to another town in order to take or keep a job would be a private expense from an employee's point of view. Timing is also important. If an expense is incurred too late - after a job has ended - it will not be incurred in the production of assessable income. Expenses are only deductible if they are incurred in the course of earning the taxpayer's income. In the Taxpayer's case, the action by the Company to recover part of the amount paid under the arrangement for moving the Taxpayer to the city led to the legal action being taken against the Taxpayer, and the associated legal expenses. At the time of the legal action you no longer worked for the Company. Because the expense was incurred after the end of the employment relationship with the Company, it is too late and too remote from the earning of income to be deductible. The attempt to recover the money only began after the employment relationship was terminated. The Taxpayer's legal position during the dispute was that the contract was not enforceable by the Company because the contract was terminated. It follows that the expenses also relate to the terminated contract. In addition, the bulk of the expenditure the Company attempted to recover related to the subsidy for moving to the city - in itself a private expense for the Taxpayer, and so expenditure to retain this amount would also be a private expense. Therefore, the associated legal expenses incurred are not an allowable deduction under section 8-1 of the ITAA 1997.