Private ruling: Legal expenses
Date of advice: 2 September 2016
Published: October 2016
Ruling period: Year ending 30 June 2016.
Date scheme commenced: 1 July 2015

Ruling: Q1: Are you entitled to a deduction for legal expenses associated with seeking legal advice regarding not receiving a redundancy payment after your position was made redundant? | A1: No.

Relevant facts and circumstances: You were employed by a company. The company made your position redundant, along with other employees. You were verbally advised by the company's Human Resources Department that you were to receive a redundancy payment. A new superintendent was appointment to the company, who reviewed your position with the company and the redundancy payment was rescinded. You sought legal action to reinstate the redundancy payment. The decision to have the redundancy payment rescinded was upheld by the Fair Work Commission. Your matter was settled.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | 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. In determining whether a deduction for legal expenses is allowed, the nature of the expenditure must be considered ( 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. If the advantage to be gained is of a capital, domestic or private nature, then the expenses incurred in gaining the advantage will also be of a capital, domestic or private nature. 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 the taxpayer for the loss of their employment position. Therefore redundancy payments are treated as Employment Termination Payments (ETP) and 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 ETP's are capital in nature, any legal expenses associated with obtaining the ETP are also capital in nature and not deductible. The Commissioner acknowledges that in your private ruling request you refer to Taxation Ruling TR 2000/5 which relates to costs incurred in preparing and administering employment agreements The ruling states that certain costs incurred by an employee are an allowable deduction, those costs being: • costs of drawing up an employment agreement with an existing employer • costs of settling disputes arising from an existing employment agreement • costs of changing conditions of an existing employment agreement • costs of renewing or extending a fixed term agreement where there is a provision allowing for renewal or extension. In your case, the legal expenses incurred were for the reinstatement of your redundancy payment, not the negotiation of conditions of employment. Therefore TR 2000/5 is not relevant to your circumstances. You have also referred to ATO Interpretative Decision (ATO ID) 2010/131 which refers to taxpayers' entitlement to claim a deduction for legal expenses incurred in seeking entitlements under an employment contract for payment in lieu of notice. As your legal expenses were incurred whilst attempting to have your redundancy payment reinstated and not to enforce, your, working conditions, ATO ID 2010/131 does not apply to your situation. As your legal expenses and ETP is capital in nature, the legal expenses are also considered to be capital in nature, whether or not the matter being resolved in your favour. Therefore the legal expenses associated with seeking the reinstatement of the redundancy payment are not deductible under section 8-1 of the ITAA 1997.