Private ruling: Legal expenses
Published: January 2014
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

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

Relevant facts and circumstances: You were retrenched from your full-time employment. Your employer offered an Employment Termination Payment (ETP). You engaged the services of a solicitor as you believed the amount offered by your employer was inadequate. You did not have a contract of employment. Your solicitor was successful in negotiating a larger payment verbally with your employer. You incurred legal expenses.

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 or are necessarily incurred in carrying on a business for the purpose of 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, or a provision of the ITAA 1997 prevents it. 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. Employment termination payments (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. Alternatively, the payment you accepted was for the full amount owed to you, whether for salary, wages or other remuneration, leave entitlements, payment in lieu of notice, severance pay, or anything else connected with the employment or cessation of the employment. Even if your employer had treated this payment as an undissected lump sum, the payment would still have been capital and a deduction not allowable for the legal expenses. As the legal expenses were incurred in gaining a capital sum, they will also be of a capital nature and are therefore not deductible.