Private ruling: Deductibility of legal expenses
Date of advice: 1 June 2017
Published: October 2017
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Question and answer | Are you entitled to a deduction for legal costs you incurred and legal costs awarded against you in relation to your legal proceedings against your former employer? | Yes.

Relevant facts and circumstances: You resigned from your employer in 201X. You commenced legal proceedings against your employer to recover unpaid commissions. You were unsuccessful in your legal proceedings. You incurred legal expenses and legal costs were awarded against you as a result of your unsuccessful legal proceedings.

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 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 and other 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). The nature or character of the expenses follows the advantage which 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 Income Tax: if an employee incurs legal expenses recovering wages paid by a dishonoured cheque, are these legal expenses an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997? , explains the deductibility of legal expenses. On the subject of whether a legal expense is a deductible expense, paragraph 1 of TD 93/29 states: Yes, providing that the legal action relates solely to the recovery of wages. This is because in deciding '…whether expenditure has the character of a capital or of a revenue payment … the advantage for which the expenditure was incurred must be identified and the manner in which it “is to be relied upon or enjoyed” must be considered…’. ( Magna Alloys & Research Pty. Ltd. v. FC of T 80 ATC 4542 at 4548; 11 ATR 276 at 283). In your case, you incurred legal expenses in relation to the recovery of unpaid commissions. Although you were unsuccessful in your legal proceedings, you incurred the expenses to recover commissions which are considered ordinary income. Therefore, the legal expenses you incurred and were awarded against you are deductible under section 8-1 of the ITAA 1997.