Private ruling: Deductions for legal expenses
Date of advice: 8 October 2025
Published: 1 December 2025
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 XXX 20XX

Ruling: Q1: Are you entitled to claim a deduction for any of the legal expenses you incurred before your employment ended on XX XXX 20XX? | A1: Yes | Q2: Are you entitled to claim a deduction for any of the legal expenses you incurred after your employment ended on XX XXX 20XX? | A2: No

Relevant facts and circumstances: You were employed by Organisation Z from XX XXX XXXX until your employment ended on XX XXX XXXX. Your payout entitlement was made XX XXX XXXX from Organisation Z on termination consisting of outstanding salary, allowances and leave entitlements. You engaged the services of XXX Solicitors and lodged application XXXX/XXXX with the Australian Federal Court on XX XXX 20XX. Application XXXX/XXXX was lodged on XX XXX 20XX and a hearing was held on XX XXX 20XX with the Federal Court of Australia between yourself as the Applicant and Organisation Z as the Respondent for reinstatement to your previous position. The court proceedings are for reinstatement to your previous position with Organisation Z and are not related to the recovery of unpaid wages, leave etc.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 6-5(2) | Income Tax Assessment Act 1997 section 8-1

Reasons for decision: Detailed Reasoning - Deductions for legal expenses: 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. Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes ordinary income derived or indirectly from all sources during the year. Salary and wages, including leave payments, is considered ordinary income as it is paid directly as a result of personal services an employee rendered for their employer. To be deductible in a particular income year under section 8-1 of the ITAA 1997, a loss or outgoing must generally have been "incurred" in the income year. "Incurred" is not defined in ITAA 1997 and in general terms, an outgoing is incurred at the time a taxpayer owes a present money debt that the taxpayer cannot escape. The courts have been reluctant to attempt an exhaustive definition of incurred, but they have developed a series of guidelines that can be used in assisting to determine whether an item has been incurred in a current income year. A number of significant court decisions have determined that for an expense to be an allowable deduction: For legal expenses to constitute an allowable deduction, it must be shown that they are incidental or relevant to the production of the taxpayer's assessable income or business operations. Also, 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). Paragraph 38 of Taxation Ruling TR 2012/8 Income tax and fringe benefits tax: assessability of amounts received to reimburse legal costs incurred in disputes concerning termination of employment states that the nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses. Therefore, if the advantage being sought is of a revenue nature, then the legal expenses will be of a revenue nature and will be deductible. Alternatively, if the advantage being sought is of a capital nature, then the legal expenses incurred in gaining the advantage will also be a capital nature and will not be deductible. It also follows that the character of the legal expenses is not determined by the success or failure of the legal action. Legal expenses are generally deductible by employees and former employees if they arise out of: It is stated that the advantages you were seeking when you incurred the legal expenses were to be reinstated into your former position with Organisation Z. The following discusses the eligibility to claim deductions for legal expenses in relation to those advantages. | Detailed Reasoning - Reinstatement/re-employment: Legal expenses incurred in relation to seeking reinstatement are considered to be incurred in order to obtain an enduring advantage, being the regaining of the employment position, and therefore is an advantage of a capital nature. Paragraph 45 of TR 2012/8 states that compensation for loss of employment, such as in an action for wrongful dismissal or loss of office, is a capital receipt ( Scott v Commissioner of Taxation ). Legal costs incurred in seeking such compensation are not deductible because the nature of the advantage sought is capital. This is so, even if the amount of compensation awarded is calculated by reference to unpaid salary or lost income or is assessable as statutory income. The deductibility of legal expenses incurred in seeking reinstatement where the former employee claimed they were unfairly dismissed was in considered in Case L26 79 ATC 126; 23 CTBR (NS) Case 32 ( Case L26 ). In that case, the taxpayer was employed as a music teacher by the Commonwealth Teaching Service. She was dismissed from her employment as a schoolteacher on the ground that she could not control classes. She was unsuccessful in her appeal to the Disciplinary Appeal Board against her dismissal. The taxpayer claimed a deduction for her legal expenses in relation to the appeal. It was held that although the expenditure was a necessary step prior to regaining income from the employment from which the taxpayer had been dismissed; it was not expenditure incurred in the course of gaining or producing such income and the expenditure was not deductible. It is also viewed that legal costs incurred in obtaining employment or re-employment (including the costs of drawing up an employment agreement) are not deductible as the expenses are preliminary costs or a capital nature: FCT v Maddalena (1971) 2 ATR 541, which are incurred too early to make them deductible. In Muesth v FC of T 2006 ATC 2217, the taxpayer was a police officer who had been suspended and then removed from the Police Service in May 2002, following a Police Integrity Commission inquiry. The taxpayer incurred legal expenses in seeking a review of the removal order in the New South Wales Industrial Relations Commission. Subsequently, the parties reached an agreement, and the taxpayer was re-employed at a lower rank from March 2003. The Administrative Appeals Tribunal held that the legal expenses were, in effect, re-employment expenses that had not been incurred in relation to the taxpayer's conduct of his day-to-day duties. Accordingly, the legal expenses were incurred too early to make them deductible in accordance with Maddalena's case . | Detailed Reasoning - Retaining your current position: The legal expenses incurred to retain your current position before your termination were related to gaining or producing assessable income and the character of the advantage sought in the litigation is of a revenue nature. The legal costs incurred with XXX XXX XXX are therefore deductible under section 8-1. | Detailed Reasoning - Reinstatement to your former position: Your position with Organisation Z had ended at the time you incurred the legal expenses in seeking to be permitted to undertake your previous position again, seeking reinstatement. Any legal expenses incurred related to seeking reinstatement into your position with Organisation Z: The nature of the advantage being sought is capital in nature and to the extent any of the legal expenses related to you seeking reinstatement to your former position with Organisation Z, are not deductible. | Detailed Reasoning - Conclusion: As the advantage that you were seeking from incurring the legal expenses to retain you position were revenue in nature, your legal expenses for $XXX are deductible under section 8-1 of the ITAA 1997. As the advantage that you are seeking from incurring the balance of the legal expenses were for reinstatement to your previous position, they are deemed capital in nature and are not deductible under section 8-1 of the ITAA 1997. Based on the information provided: It is viewed that the advantages you were seeking in relation to the legal expenses you incurred go beyond a claim for revenue and were capital in nature.

it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expenses ( Lunney v FC of T ; (1958 100 CLR 478) | there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income ( Ronpibon Tin NL v FC of T , (1949) 78 CLR 47), and | it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income ( Charles Moore Co (WA) Pty Ltd v FT of T , (1956) 95 CLR344; FC of T v Hatchett , 71 ATC 4184). | recovering unpaid wages, unused annual leave and unused long service leave in accordance with the principles contained in 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? | instituting proceedings and settling disputes arising out of employment agreements, such as to enforce a contractual entitlement ( Romanin v FCT (2008) 73 ATR 760) | preventing redundancy or dismissal. In FC of T v Rowe (1995) 31 ATR 392; 95 ATC 4691, the taxpayer, an employee, was suspended from normal duties and was required to show cause why he should not be dismissed after several complaints were made against him. A statutory inquiry subsequently cleared him of any charges of misconduct or neglect. The court accepted that the legal expenses incurred by the taxpayer in defending the manner in which he performed his duties, in order to defend the threat of dismissal, were allowable. Since the inquiry was concerned with the day-to-day aspects of the taxpayer's employment, it was concluded that his costs of representation before the inquiry were incurred by him in gaining assessable income; and | defending the manner in which employment duties are performed ( Inglis v FCT 87 STC 2037). | are considered to be incurred in order for you to obtain an enduring advantage, being the regaining of your employment. | It cannot be viewed that the legal expenses have been incurred in relation to you recovering any unpaid remuneration from Organisation Z as you had been paid all remuneration owing to you at the time your employment had ended. | You have not incurred the legal expenses to prevent you from being made redundant or being dismissed from your position with Organisation Z, or in relation to your contractual agreement with Organisation Z, as the legal expenses were incurred after your employment and contract had ended; and | The legal expenses were incurred in relation to re-employment and not in relation to the conduct of your day-to day duties in your former position with Organisation Z.