Private ruling: Legal expenses
Published: February 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a deduction for the legal expenses incurred? | A1: No.

Relevant facts and circumstances: You were an employee. Your employer changed your position. Your previous roles no longer exist and are not required to be performed. You believed your position had been made redundant however your employer disputed this. You sought legal representation in order to obtain a redundancy payment. You reached a settlement with your employer. You incurred legal expenses in regards to the representation.

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 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 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. 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. Redundancy payments are treated as eligible 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. In your situation, you incurred legal expenses in seeking to obtain a redundancy payment. As this type of payment is capital in nature, the legal expenses incurred in seeking this payment are also capital in nature. Accordingly, you are not entitled to a deduction under section 8-1 of the ITAA 1997 for the legal expenses incurred.