Private ruling: legal expenses
Published: March 2014
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to claim a deduction for legal expenses incurred in seeking an additional four weeks wages on termination of notice? | A1: Yes

Relevant facts and circumstances: Your employment was terminated on notice. You engaged a law firm to represent you as you considered you had not received your full entitlement on termination.

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 losses and outgoings which are incurred in the course of gaining or producing assessable income. However, no deduction is allowed where the losses or outgoings are capital, or are of a capital, private or domestic nature or another provision prevents the taxpayer from deducting it. In determining whether a deduction for legal expenses is allowed under section 8-1 of the ITAA 1997, 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. The character of legal expenses is not determined by the success or failure of the legal action. If expenses are incurred to dispute the receipt of income contractually owed under an employment contract, such as unpaid wages, the expenses are of a revenue nature and allowable as a deduction. In your circumstances you were entitled to three months wages when given notice. The employer was not willing to honour this entitlement and you engaged a legal entity to argue your case. This resulted in you receiving your wage entitlement. Therefore the expenses you incurred to dispute the receipt of income contractually owed to you are of a revenue nature and allowable as a deduction under section 8-1 of the ITAA 1997.