Private ruling: Legal fees
Date of advice: 12 August 2016
Published: September 2016
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you entitled to claim a deduction for legal expenses incurred to obtain an employment termination payment (ETP)? | A1: No

Relevant facts and circumstances: The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: • the application for private ruling, • copy of you PAYG payment summary, • copy of termination employment payment, • copies of invoices for legal fees and • Letter to the ATO You suffered a workplace incident, making it impossible to work there. You took the matter to the Relevant Authority and you incurred legal fees. In response to this and the potential for further legal action and costs it was agreed that you resign and take a termination payment.

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

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for a loss or 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 or relates 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 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. Taxation Determination TD 93/29 states that expenses incurred in relation to an action for breach of a taxpayer's contract of employment, for example, an action for damages for wrongful dismissal, are capital in nature and not deductible. Employment termination payments (ETP), which are considered to be capital payments, are 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 have incurred legal expenses to take action against your former employer. The payment that you received is considered an ETP and is capital in nature and consequently the legal expenses incurred in obtaining the ETP are also capital in nature. Accordingly, no deduction is allowable under section 8-1 of the ITAA 1997 for the legal expenses you incurred in pursuing this payment.