Private ruling: Legal Expenses
Date of advice: 16 February 2026
Published: 7 April 2026
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is payment of court costs deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA1997)? | A1: Yes.

Relevant facts and circumstances: You were employed by your Employer at District B from DDMMYYY until your forced redundancy DDMMYYYY. You commenced a newly offered Position A by Director A on DDMMYYYY at a new level of pay. On receipt of first payslip after commencement of Position A you raised with Director A that you had not received the agreed salary increase. Over the period DDMMYYYY until your redundancy you continued to request payment of the outstanding wages based on the agreed wage for Position A and the salary increases which would have potentially been applicable at annual performance reviews. On DDMMYYYY you engaged the services of Solicitor A to communicate with your Employer requesting payment of the outstanding wages or legal proceedings would commence. The case was listed for hearing on DDMMYYYY. On the day of the hearing the solicitor your Employer engaged advised your solicitor that you would not be successful in your legal proceeding. They requested that you sign a Deed of Release to pay the amount of $XX,XXX.XX for court costs incurred by your Employer. This was agreed on, and you paid the amount of DDMMYYYY after seeking direction from your solicitor. The Deed of Release was not signed due to a clause not being agreed on. You currently continue to be employed by your Employer in a different area.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1

Reasons for decision: Summary: Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes ordinary income derived or indirectly from all sources during the year. Salary and wages, including leave payments, is considered ordinary income as it is paid directly as a result of personal services an employee rendered for their employer. Section 8-1 of the 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. To be deductible in a particular income year under section 8-1 of the ITAA 1997, a loss or outgoing must generally have been "incurred" in the income year. "Incurred" is not defined in ITAA 1997 and in general terms, an outgoing is incurred at the time a taxpayer owes a present money debt that the taxpayer cannot escape. The courts have been reluctant to attempt an exhaustive definition of incurred, but they have developed a series of guidelines that can be used in assisting to determine whether an item has been incurred in a current income year. A number of significant court decisions have determined that for an expense to be an allowable deduction: • it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expenses ( Lunney v FC of T ; (1958 100 CLR 478), • there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income ( Ronpibon Tin NL v FC of T , (1949) 78 CLR 47), and • it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income ( Charles Moore Co (WA) Pty Ltd v FT of T , (1956) 95 CLR344; FC of T v Hatchett , 71 ATC 4184) For legal expenses to constitute an allowable deduction, it must be shown that they are incidental or relevant to the production of the taxpayer's assessable income or business operations. Also, in determining whether a deduction for legal expenses is allowable 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). Paragraph 38 of Taxation Ruling TR 2012/8 states that the nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses. Therefore, if the advantage being sought is of a revenue nature, then the legal expenses will be of a revenue nature and will be deductible. Alternatively, if the advantage being sought is of a capital nature, then the legal expenses incurred in gaining the advantage will also be a capital nature and will not be deductible. It also follows that the character of the legal expenses is not determined by the success or failure of the legal action. Legal expenses are generally deductible by employees and former employees if they arise out of: • recovering unpaid wages, unused annual leave and unused long service leave in accordance with the principles contained in Taxation Determination TD 93/29 • instituting proceedings and settling disputes arising out of employment agreements, such as to enforce a contractual entitlement ( Romanin V FCT (2008) 73 ATR 760) • preventing redundancy or dismissal. In FC of T v Rowe (1995) 31 ATR 392; 95 ATC 4691, the taxpayer, an employee, was suspended from normal duties and was required to show cause why he should not be dismissed after several complaints were made against him. A statutory inquiry subsequently cleared him of any charges of misconduct or neglect. The court accepted that the legal expenses incurred by the taxpayer in defending the manner in which he performed his duties, in order to defend the threat of dismissal, were allowable. Since the inquiry was concerned with the day-to-day aspects of the taxpayer's employment, it was concluded that his costs of representation before the inquiry were incurred by him in gaining assessable income; and • defending the manner in which employment duties are performed ( Inglis v FCT 87 STC 2037. It is stated that the advantages you were seeking when you incurred the legal expenses were to be paid the calculated unpaid wages and to retain the option of continuing to be employed by your Employer. There is a clear connection between the assessable income and the expense. The expenses were not incurred in respect of income that was capital, private or domestic in nature. As such, the legal expenses were incurred in gaining your assessable income and are deductible under section 8-1 of the ITAA 1997. The following discusses the eligibility to claim deductions for legal expenses in relation to those advantages. | Detailed Reasoning - Application to your situation: You were employed by your Employer in District B from DDMMYYYY until your forced redundancy on DDMMYYYY. Your payout entitlement was made by your Employer in District B on DDMMYYYY. This payment consisted of outstanding salary, allowances and leave entitlements. You engaged the services of Solicitor A to assist in legal proceedings in the matter of unpaid wages. The legal proceedings were lodged with a Defence Callover set down for DDMMYYYY. Application Case Number XXX was listed for a hearing date on DDMMYYYY. The fee incurred was for payment of the Defendant's court costs after agreement to withdraw the application and pay Employer A court costs. | Detailed Reasoning - Conclusion: As the advantage that you were seeking when incurring the legal costs was for outstanding income the expenses incurred are considered revenue in nature. The expense incurred in paying the Defendant's court costs are deductible under section 8-1 of the ITAA 1997.