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

Ruling: Q1: Are you entitled to a deduction for legal expenses incurred in pursuing payment of your redundancy entitlements? | A1: No.


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

Reasons for decision: Summary: The advantage you were seeking in incurring the legal expenses is considered to be an advantage of a capital nature. As the nature or character of legal expenses follows the advantage that is sought to be gained by incurring the expenses, the expenses you have incurred are considered to be of a capital nature and are not deductible. | Detailed Reasoning - Detailed reasoning: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for a loss or an outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature. 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). 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. Taxation Determination TD 93/29 states: If the legal action goes beyond a claim for a revenue item such as wages, and constitutes an action for breach of the contract of employment where the essential character of the advantage sought relates to an enduring advantage that is of a capital nature, the legal costs would not be deductible. For example, legal expense relating to an action for damages for wrongful dismissal are not deductible. Although your legal expenses do not relate to damages for wrongful dismissal, they relate to your redundancy payment and not salary or wages. A redundancy payment, being compensation for the loss of the expectation of continuity of service, is a payment that is capital in nature. Such a payment is made to compensate the taxpayer for the loss of their employment position and is regarded as a capital payment ( Case Y24 91 ATC 268; AAT Case 6942 (1991) 22 ATR 3184). Redundancy payments are treated as employment termination payments and subject to special tax treatment that may result in some or all of the amount being included in your 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 your assessable income. Therefore as a redundancy payment is capital in nature, the legal expenses incurred in obtaining a better redundancy payment will also be capital in nature. In Romanin v. FC of T 2008 ATC 20-055; [2008] FCA 1532; 73 ATR 760 ( Romanin ) the court considered the deductibility of legal expenses incurred by the taxpayer for proceedings at the Industrial Relations Commission. In the proceedings, the taxpayer argued that an employment contract existed where they were 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 them the total value of the employment package for the period of 12 months less any salary and other earnings that they 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. Legal expenses incurred to recover income payments such as were at issue in Romanin - that is, salary that would have been derived during the notice of termination period, had it been given - will be deductible, even if the receipt was paid as a lump sum and subject to assessment as an employment termination payment. In your case, you were given the required notice as per your employment agreement, and unlike Romanin , you are not seeking payment in lieu of notice or a contractual entitlement to salary. The payment of redundancy entitlements you are seeking is capital in nature. Therefore, the legal expenses you incur in pursuing this payment are also capital in nature and consequently 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 previously sought legal advice in relation to the interpretation of an ambiguous clause in your employment contract regarding your payout upon redundancy. | Your employment was terminated. Your employer gave you the notice as required under your employment agreement. | Upon termination, you received some redundancy payment, however, not what you believe to be your full entitlement. | You are seeking to obtain increased redundancy entitlements. You are incurring legal expenses in relation to this matter.