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

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

Relevant facts and circumstances: Your employment was terminated. You lodged an application for unlawful dismissal. Your employer agreed to pay a redundancy payment. You incurred legal fees to pursue and obtain the payment.

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. 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. 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 Redundancy payments are treated as eligible termination payments and subject to special tax treatment that may result in some, or all, of the amount being included in your 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 your assessable income. In your situation, you incurred legal expenses in seeking to obtain a redundancy payment. As this type of payment is capital in nature, the legal expenses incurred in seeking this payment are also capital in nature. Accordingly no deduction is allowable for your legal expenses.