Private ruling: Work Related Expenses – Legal Fees
Date of advice: 3 October 2018
Published: November 2018
Ruling period: Year ended 30 June 20YY
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to a deduction for legal expenses incurred in an unfair dismissal claim against your former employer? | A1: Yes | Q2: Are you entitled to a deduction for legal expenses incurred in a claim against a workers compensation entity? | A2: Yes

Relevant facts and circumstances: You were employed by Company A and were made redundant in Spring 20XX. You engaged legal practitioners to assist you in taking legal action against the dismissal to a legal tribunal and, separately, to the Relevant Court. Your claims against your former employer included: ● Loss of underpaid wages ● Loss of underpaid superannuation ● Legal fees ● Imposition of a penalty i.e. unpaid entitlements of wages and superannuation Your action against your employer was settled with an agreement under which you received an amount of $X in lieu of penalties sought and $Y in payment of your legal costs. Your claims against the workers compensation entity included: ● Compensation for injuries ● Legal fees You action was settled with an agreement under which you received $X for injuries and in payment of your legal costs. ● You incurred legal expenses for representing you in these cases. You wish to claim the net amount of your legal fees and associated costs as deductions, after allowing for any reimbursements received for legal fees in your legal settlements. You have provided copies of invoices from solicitors for your legal fees which are categorised as various work associated with these separate claims.

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, 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. Generally, legal expenses incurred in an unfair dismissal action (seeking reinstatement and/or damages) are of a capital nature and therefore, not deductible. Paragraph five of Taxation Determination TD93/29 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, the legal costs would not be deductible because they are capital in nature. For example, legal expenses relating to an action for damages for wrongful dismissal are not deductible. In your case, you incurred expenses in taking legal action against your employer for unfair dismissal. Your legal action has not gone beyond a claim for revenue hence the legal costs are deductible, because they are not capital in nature. As your legal costs were not capital in nature and therefore in accordance with Commissioners view expressed in TD 93/29 are deductible under section 8-1 of the ITAA 1997.