Private ruling: Legal Expenses
Date of advice: 26 August 2015
Published: August 2015
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you entitled to claim a deduction for your legal expenses? | A1: Yes


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

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 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. The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses ( Hallstroms Pty Ltd v. FC of T (1946) 72 CLR 634; (1946) 8 ATD 190). 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 Ruling TR 2000/5 examines the deductibility of costs incurred in protecting an existing right under an employment agreement. This ruling allows that the costs associated with settlement of disputes arising from an existing employment agreement, are allowable deductions. In your situation, you incurred costs in obtaining legal advice to ensure you received your correct commission income on the termination of your employment. The cost was incurred in gaining assessable income. You are therefor entitled to a deduction for these legal expenses.

Relevant facts: You were employed as a manager. Your income consisted of salary and commissions where commission was a significant portion of our overall income. | You received your commission on the sales of goods and services that you made, and these commissions were generally paid to you some time after the sale was invoiced. This delay was due to administrative and contractual reasons. | You resigned from this position and left your employer. | Your contract of employment did not provide any detail as to what commission should be paid to you on your termination of your employment. | You engaged a legal firm to provide you with legal advice on your entitlement to commissions that were unpaid at the time of your resignation and how any payment could be successfully negotiated. | You used this advice to negotiate a payment for unpaid commission at the time of your resignation.