Private ruling: Legal expenses
Published: September 2011
Ruling period: Income year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to a deduction for legal expenses incurred in defending a claim against an employer? | A1: No

Relevant facts and circumstances: Due to a code of conduct charge, your employer terminated your employment with payment of any outstanding accruals being paid to you. You then commenced legal proceedings for unfair dismissal. You attended a reconciliation meeting with your lawyer, your employer and a relevant authority to resolve the allegations in question. As of a result of the hearing, the matter was not resolved. You have provided a list of the legal expenses that you have paid for this action.

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. 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. Generally, legal expenses incurred in an unfair dismissal action (seeking reinstatement and/or damages) are of a capital nature and therefore, not deductible. Paragraph five of the Taxation Determination TD93/29 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 expenses relating to an action for damages for wrongful dismissal are not deductible. In your case, the legal expenses you incurred were all in relation to defending a code of conduct charge within the terms and conditions of your employment, against your employer which resulted in your dismissal. Your legal costs were all capital in nature and therefore, in accordance with the Commissioner's view expressed in TD 93/29, are not deductible under section 8-1 of the ITAA 1997.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.