Private ruling: legal expenses
Published: December 2014
Ruling period: Income year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a deduction of $X under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for legal expenses? | A1: Yes

Relevant facts and circumstances: You have commenced legal proceedings against a former employer to recover an amount in relation to unpaid salary and leave entitlements you were entitled too.

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. In determining whether a deduction for legal expenses is allowed under section 8-1 of the ITAA 1997, the nature of the expenses 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 is of a capital or private nature, then the expenses incurred in gaining the advantage will also be of a capital or private nature. An amount that is capital in nature will remain capital notwithstanding that it is specifically included in the assessable income of the taxpayer. It is considered that the advantage sought in the litigation was the recovery of salary and leave entitlements. Payments made for salary and leave entitlements are clearly assessable income and it follows that legal expenses incurred in the recovery of assessable income will be deductible under section 8-1 of the ITAA 1997.