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

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


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 allows a deduction for a loss or outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature or relates to the earning of exempt income. 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. The nature or character of expenses follows the advantage that is sought to be gained by incurring the expenses ( Hallstroms Pty Ltd v. FC of T (1946) 72 CLR 634; (1946) 8 ATD 190). 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. The Commissioner of Taxation considers that expenses incurred in relation to an action for breach of a taxpayer's contract of employment, for example, an action for damages for wrongful dismissal, are capital in nature and not deductible (Taxation Determination TD 93/29 Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities). In your case, you instigated action against your employer claiming unfair dismissal. As stated above, expenses relating to damages for wrongful dismissal are considered to be capital in nature. As the legal expenses were incurred in seeking to gain a capital sum, they will also be of a capital nature and are therefore not deductible.

Relevant facts: You were dismissed from your employer. | You are taking legal action for unfair dismissal.