Private ruling: Legal expenses
Date of advice: 23 June 2016
Published: August 2016
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Question and answer | Are you entitled to a deduction for legal expenses? | No.

Relevant facts and circumstances: You were dismissed from your employment. Your former employer claimed serious misconduct. You engaged a lawyer to make an application to the Fair Work Commission. You were seeking compensation for unfair dismissal through the Fair Work Commission. You reached an agreement at the Fair Work Commission which did not include any monetary compensation.

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

Reasons for decision: Summary: Section 8-1 of the 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. Legal expenses are generally deductible if they arise out of the day to day activities of the taxpayer's business ( Herald and Weekly Times Ltd v. Federal Commissioner of Taxation (1932) 48 CLR 113). For legal expenses to constitute an allowable deduction, it must be shown that they were incidental or relevant to the production of the taxpayer's assessable income, ( Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47). 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). The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses. Taxation ruling TR 2012/8 at paragraph 45 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). The deductibility of legal expenses incurred in relation to an action for unfair dismissal was 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 school teacher 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. Thus, the expenditure was not deductible. The decision in the above case is confirmed in Taxation Determination TD 93/29 which states that legal expenses relating to an action for wrongful dismissal are not deductible. The expenses are capital in nature and also are not incurred in order to gain an income amount. In your case you were seeking compensation for wrongful dismissal from your former employer. You reached an agreement in the Fair work Commission which did not include monetary compensation. The legal expenses are capital in nature and are not deductable under section 8-1 of the ITAA 1997.