Private ruling: Legal expenses
Published: October 2011
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to a deduction for legal expenses? Answer No.



Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 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. 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 nature, then the expenses incurred in gaining the advantage will also be of a capital nature. It follows also that the character of legal expenses is not determined by the success or failure of the legal action. Redundancy payments are treated as employment termination payments (ETP) 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 specifically included in the assessable income of the taxpayer. In your case, you incurred the legal expenses seeking to obtain the ETP. Although the ETP may be included in the assessable income, the ETP retains its character as a capital receipt. As the legal expenses were incurred in gaining a capital sum, they will also be of a capital nature and are therefore not deductible.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: You were employed with the employer for a number of years. | You entered into a new employment contract in 2005. | Among other things, your contract states that your redundancy pay would be payment equivalent to the amount that would have been a salary package payable to you as for the period from the date of ceasing employment up to the expiry date of the term of the contract. | Your employment was terminated. | You took legal action to enforce your entitlement under the contract in relation to the redundancy payment. | Relevant legislative provision: Income Tax Assessment Act 1997 Section 8-1