Private ruling: Deductions for legal expenses
Date of advice: 3 June 2026
Published: 17 August 2026
Ruling period: Period ended DD MM YY.
Date scheme commenced: DD MM YY

Ruling: Q1: Are the legal expenses you incurred in negotiating your redundancy deductible under section 8-1 of Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. The legal fees you wish to claim were incurred in seeking and negotiating a redundancy package from your employer. A redundancy package is capital in nature and the legal expense incurred in obtaining one are also capital in nature. As such you are not entitled to a deduction for the legal fees under section 8-1 of the ITAA 1997.

Relevant facts and circumstances: On DD MM YY you commenced employment with Company A. Your initial salary was $X per annum with a variable commission up to X% and your final yearly salary at the time you left employment with the company was $X. You worked for the company for approximately X years and X months. Sales initially increased after you began working for the company. In YY sales decreased. In YY the company introduced 2 price increases. Customers were also to be directed to make more use of the company's 'shop online' portal. On DD MM YY you attended a meeting at your workplace with your direct manager Person A and another employee of the company Person B. At this meeting you were provided with a document titled 'Confirmation of consultation meeting' which was dated for that day. This advised: • that due to a combination of a downturn in sales and a need to align the company with a global inside sales structure, the Spare Parts area you managed was going to be restructured, • that the company was considering making the position you held redundant, • that the purpose of the meeting was to discuss this and potential redeployment opportunities with you, • two new roles were outlined and position descriptions provided to you for consideration, • another meeting was scheduled for DD MM YY to give you time to consider these new roles and make note of any questions you had about the roles and the proposed restructure. On DD MM YY your lawyer Person C sent an email to Person A advising they acted for you. The email detailed: • your basic employment details and some statistics for your work performance, • a summary on redundancy as a concept and the steps involved in a genuine redundancy process, • some details and arguments from you in respect to the drop in sales at the company, • a summary of the meeting held on DD MM YY from your point of view and a comparison of this to the pre-noted redundancy process, • it addressed the effect this meeting and proposed redundancy of your position had on your mental health and that what had been proposed was not a genuine redundancy per the concept outlined, • it advised that you were prepared to sign a Deed of Release if the company paid you a lump sum compensation amount of $X, plus X weeks' notice and your full annual leave entitlements. On DD MM YY Person D, HR Manager for the company, replied to Person C's email. This response: • advised that you had not been made redundant or your employment terminated, • it disputed all the claims made by Person C in their email and further noted an additional meeting had been offered to you to allow you to ask any questions and it queried if you still wished to take that opportunity or not. On DD MM YY Person C replied to Person D to advise you would attend the meeting but only with your spouse and lawyer as support people. Person C asked to be provided with available dates and times. On DD MM YY Person D replied to Person C to noting your attendance was contingent on the presence of your support people. They advised that the purpose of the meeting was to obtain your feedback regarding the restructure. They noted you were currently on sick leave under a medical certificate and advised they would need a medical certificate from your doctor confirming your ability to attend. Several more emails were sent between Person C and Person D settling on a time for the meeting of DD MM YY at an agreed time. On DD MM YY Person D sent an email to Person C summarising the meeting. This detailed: • that you had explained how the initial meeting had made you feel, • that you believed of the two roles offered to you, one was the same as your previous role, and the other was too junior, • that Person B who had attended, had explained the reason for the restructure and change to roles, • that you felt you could no longer work under Person A and you asked to report to a different manager, • that you were advised that with the way the department was going to be structured this was not possible, • that you had indicated you were willing to take a redundancy. The email also put forward a redundancy offer composed of: • an amount equivalent to X weeks' pay in lieu of notice, • a severance amount equivalent to X weeks' pay, • annual leave entitlements, • long service leave entitlements (pro-rata), • an ex-gratia payment of $X, • a X month outplacement support package, and • continued access to EAP for X months. The email detailed that this offer was open for acceptance up to a set time on DD MM YY. On the same day Person C replied to Person D with a counteroffer for the redundancy. The only difference in this offer was that the ex-gratia payment was an amount of $X. On the same day Person D replied to Person C with the company's final offer which was for the same details except an ex-gratia payment of $X. A proposed Deed of Release was attached. On DD MM YY Person C replied to Person D's email advising that in the interest of settling the matter you had agreed to this package. Person C advised they had reviewed the attached deed and had one change to the deed so that it reflected both parties mutually in a clause restricting any future misrepresentation of both parties. The Deed of Release was drawn up on the same day and signed on the same day by you, detailing your termination of employment as of this date. On DD MM YY you were issued with payment summary for the redundancy payment.

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

Reasons for decision: Summary: 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, or relate to the earning of exempt income. 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). In determining whether a deduction for legal expenses is allowable, the nature or character of the expenditure must be considered, that is, whether the legal expenses are incurred for a capital or a revenue purpose ( 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. For example, if the advantage to be gained is of a capital nature, then the legal expenses incurred in gaining the advantage will also be of a capital nature and are not deductible. 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 and FC of T 87 STC 2037). | Detailed Reasoning - Application to your circumstances: The communications between your lawyer and the HR manager of the company indicate you were seeking a redundancy payment. The initial request made by your lawyer was for a compensation payment, requested after discussing a genuine redundancy and detailing actions in line with termination. However, the response from your employer was adamant that you were not being terminated or made redundant so compensation was not an issue for consideration. Your position was not at risk. It was in fact the position you held that was being made redundant and it was explained that this was due to a planned restructure, not as a result of your employment performance. You were offered alternative roles within the company. Only when you made it clear you wanted neither role and you would not work under your former manager anymore, was a redundancy offered to you. From that point, all negotiations were centred around the amount of the ex-gratia component of the redundancy payment. | Detailed Reasoning - Redundancy payment: The nature of a redundancy payment was considered in Case Y24 91 ATC 268; AAT Case 6942 (1991) 22 ATR 3184. In that case, it was held that 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 for the loss of employment position, that is, as compensation for the sterilisation of a capital asset, and thus is capital in nature. Redundancy payments are treated as eligible termination payments and subject to special tax treatment that may result in some or the entire amount being included in the taxpayer's assessable 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 included in the assessable income. A redundancy payment received by a taxpayer is capital in nature and consequently the legal expenses incurred in seeking the redundancy payment are also capital in nature. The legal expenses you incurred in seeking a redundancy payment are not deductible as they are expenses of a capital nature.