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

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

Relevant facts and circumstances: You were offered a role in a newly established venture. You were required to think about the offer received and report back with any possible amendments/suggestions/negotiations before finalising the employment contract. You consulted a legal practitioner to help you understand different legal and tax implications and gain in depth knowledge on relevant commission and pay structure schemes.

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 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. For legal expenses to constitute an allowable deduction it must be shown that they were incidental and relevant to the production of the taxpayer's assessable income ( Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431). The nature of the expenditure must also be considered ( Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 8 ATD 190). The nature or character of the legal expense 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 expense incurred in gaining the advantage will also be of a capital nature. Taxation Ruling TR 2000/5 sets out the Commissioner's view of the application of section 8-1 of the ITAA 1997 to costs incurred by employees and employers in preparing and administering employment agreements. TR 2000/5 states that a deduction is not allowable for the costs of drawing up an employment agreement with a new employer as the expenses are incurred at a point too soon to be considered as being incurred in the production of assessable income and, further, it is a capital expense. In your case you incurred legal expenses in relation to drawing up a new employment agreement with a newly established venture. As stated in TR 2000/5, these expenses are considered to be incurred at a point too soon to be incurred in the production of your assessable income and are also capital in nature. Therefore, you are not entitled to a deduction for these expenses under section 8-1 of the ITAA 1997.