Private ruling: Legal expenses
Published: March 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to a deduction for legal expenses incurred to undertake a claim of unfair dismissal against your employer? Answer No.

Relevant facts and circumstances: Your employment was terminated. You took your employer to court. Your claim was for unfair dismissal and you were seeking reinstatement to your former position. The matter was settled with you receiving a lump sum payment which included any and all payments due from your employer. You have incurred legal fees.

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 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. 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. Generally, legal expenses incurred in an unfair dismissal action (seeking reinstatement and/or damages) are of a capital nature and therefore, not deductible. Taxation Determination TD 93/29 examines the deductibility of legal expenses in certain situations and states: If the legal action goes beyond a claim for a revenue item such as wages, and constitutes an action for a breach of the contract of employment, the legal costs would not be deductible because they are capital in nature. For example, legal expenses relating to an action for damages for wrongful dismissal are not deductible. In your case, you incurred legal expenses in relation to a claim for unfair dismissal. The expenses were incurred in seeking reinstatement to your former position and are considered capital in nature. Therefore, you are not entitled to a deduction under section 8-1 of the ITAA 1997 for the costs incurred in seeking reinstatement to your former position. | Detailed Reasoning - Your contentions: In your response to a request for further information for your private ruling application you stated that you considered Romanin v. FC of T 2008 ATC 20-055; [2008] FCA 1532 ( Romanin) was applicable to your circumstances. In Romanin the court considered the deductibility of legal expense incurred by the taxpayer for proceedings at the Industrial Relations Commission. In the proceedings, the taxpayer argued that an employment contract existed where he was entitled to 12 months notice, or a payment in lieu of this notice. The employer had denied such a contract existed and had given seven days notice. The proceedings found in favour of the taxpayer and the employer was ordered to pay him the total value of the employment package for the period of 12 months less any salary and other earnings that he had earned in alternative employment during the 12 months following the termination of his employment. The legal expenses were found not to be capital in nature because the character of the advantage which the taxpayer sought in bringing the proceedings was on revenue account, namely receipt of his contractual entitlement to salary he would have received had he been given 12 months notice. This case can be distinguished from cases in which legal expenses are incurred in seeking compensation for loss of employment, such as in an action for wrongful dismissal or loss of office where the advantage sought is of a capital nature. In such cases, the legal expenses are of a capital nature, even if the amount awarded is calculated by reference to unpaid salary or lost income, or is assessable as statutory income. We consider that you situation can be distinguished from Romanin as the legal expenses you incurred were for an action of unfair dismissal.

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