Private ruling: Legal expenses
Date of advice: 15 September 2016
Published: November 2016
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you entitled to a deduction for legal expenses associated with seeking legal advice regarding not receiving a redundancy payment after your position was made redundant? | A1: No. | Q2: Are you entitled to claim a deduction for legal expenses associated with the legal advice regarding your employment contract? | A2: Yes.

Relevant facts and circumstances: You are employed by a company. You were advised that your position was to be impacted by organisation changes. You were later advised your position was no longer required and that you would be redundant. You were later advised that your redundancy offered was being rescinded and you would be located to another work site in a different role. Your employer advised you the conditions of your new role, which include a decrease in pay and that your roster would change with all other aspects of your employment to remain unchanged. You sought legal advice to either have your previous conditions restored or have your employer pay you the offered redundancy payment. Your matter is ongoing and not currently resolved. Assumption(s) You may receive a redundancy payment when the matter is resolved.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 8-1 Further issues for you to consider | If you receive a payment when the matter is resolved, the amount may be assessable depending on what it is paid for. Payments for other reasons may be assessable as employment termination payments or under the capital gains tax provisions of the tax legislation. We recommend you contact the Tax Office when your matter has been resolved.

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, 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, domestic or private nature, then the expenses incurred in gaining the advantage will also be of a capital, domestic or private nature. Legal expenses relating to seeking a redundancy payment 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 the taxpayer for the loss of their employment position. Therefore redundancy payments are treated as employment termination payments (ETP) and subject to special tax treatment that may result in some or all of the amounts being included in 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 specifically included in assessable income. Under paragraph 8-1(2)(a) ITAA 1997 you cannot deduct a loss or outgoing to the extent that the loss or outgoing is capital or capital in nature. As ETP's are capital in nature, any legal expenses associated with obtaining the ETP are also capital in nature and not deductible. Legal expenses associated with enforcing or negotiating an employment contract 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. Employment agreements are a written, legal and binding confirmation of the employer/employee relationship (paragraph 11 TR 2000/5). Paragraph three of TR 2000/5 states that the costs of changing the conditions of an existing employment agreement with the same employer - providing the existing agreement allows for it, are an allowable deduction. This would include the costs of representation. A deduction is not allowable for the costs of drawing up an employment agreement with a new employer or costs of drawing up an employment agreement upon re-employment with an employer following termination of a fixed term employment contract where the agreement makes no provision for renewal or extension. In your case, you incurred legal expenses in relation to the maintaining the conditions of your previous employment contract with your new employment contract with the same employer. Consequently there is a clear connection between the assessable income and the expenses. Therefore, you are entitled to a deduction for the legal expenses incurred in negotiating the new employment contract under section 8-1 of the ITAA 1997. Apportion of expenses As discussed above, some of the legal expenses you have incurred are deductible as they relate to your assessable income, whilst other legal expenses are not deductible. Where legal expenses are both deductible and non-deductible, they must be apportioned and only the deductible portion can be claimed. Apportionment may be based on time spent on the various claims or the monetary value of each claim. In determining the legal expenses deductible, only those invoices which meet the substantiation requirements of section 900-115 of the ITAA 1997 will be used. Receipts, trust account statements, cheque butts, credit card statements and statements of accounts do not meet the substantiation requirements as they do not provide sufficient information.