Private ruling: Deduction for legal fees related to a court appeal
Date of advice: 20 March 2019
Published: May 2019
Ruling period: Year ending 30 June 20xx | Year ending 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Can you claim a deduction for legal fees related to a court appeal? | A1: Yes

Relevant facts and circumstances: You were dismissed from your employment. You sought reinstatement. The reinstatement was successfully appealed by your employer. You appealed to the relevant Court of Appeal Legal costs were incurred for filing, application an appearance fees. A certificate of determination was issued to you on for $XXX. Legal costs payments were deducted from salary during 20XX/XX and 20XX/XX tax years in the amount of $XX. You made a final payment of $XX in 20XX with this amount agreed by the parties.

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

Reasons for decision: Summary: Section 8-1 of the Income Taxation Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature. In determining whether a deduction for legal expenses is allowable 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. Paragraph one of 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? states legal fees are deductible, provided 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’s 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). TD 93/29 states that if the legal action goes beyond a claim for revenue and constitutes an action for breach of employment contract where the essential character of the advantage sought relates to an enduring advantage that is of a capital nature, the legal costs would not be deductible. In your situation you took legal action to defend your employment position, and this relates to an enduring advantage that is capital in nature. Accordingly, you are not entitled to a deduction for the legal expenses under section 8-1 of the ITAA 1997.