ATO Interpretative Decision
ATO ID 2002/213
Income Tax
Legal Expenses - Release from existing employment to take up new employmentFOI status: may be released
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This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is a taxpayer entitled to claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for legal expenses incurred in obtaining a release from their previous employment to facilitate a transfer to their current employment?
Decision
No. The taxpayer is not entitled to claim a deduction under section 8-1 of the ITAA 1997 for legal expenses incurred in obtaining a release from their previous employment to facilitate a transfer to their current employment.
Facts
The taxpayer was an employee in full time employment with their former employer.
The taxpayer received an offer of full time employment from another employer that offered:
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- improved career development opportunities
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- higher remuneration.
The taxpayer incurred legal expenses in obtaining release from their former employer to take up the new offer of employment.
Reasons for Decision
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.
The courts have considered the meaning of 'incurred in gaining or producing assessable income'. In Ronpibon Tin & NL Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; [1949] HCA 15; (1949) 8 ATD 431 the High Court stated that:
For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing assessable it must be incidental and relevant to that end. The words "incurred in gaining or producing the assessable income" mean in the course of gaining or producing such income.
The expenditure must therefore be related to the production of assessable income and not incurred at a point too soon to be deductible (FC of T v. Maddalena 71 ATC 4161; (1971) 2 ATR 541; (1971) 45 ALJR 426).
The legal expenses incurred by the taxpayer to obtain a release from their former employer are:
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- not related to the earning of assessable income from their former employer and
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- incurred at a point too soon in gaining or producing assessable income from their current employer.
The taxpayer is therefore not entitled to a deduction under section 8-1 of the ITAA 1997 for legal expenses incurred in obtaining a release from the former employer to take up the new employment offer.
Amendment History
| Date of Amendment | Part | Comment |
|---|---|---|
| 13 March 2015 | Decision | Updated for clarity |
| Facts | Updated for clarity | |
| Reasons for Decision | Updated citations and punctuation | |
| Case References | Updated citations |
Year of income: Year ended 30 June 2001
Legislative References:
Income Tax Assessment Act 1997
section 8-1
Case References:
Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation
(1949) 78 CLR 47
[1949] HCA 15
8 ATD 431
71 ATC 4161
(1971) 2 ATR 541
(1971) 45 ALJR 426
Keywords
Legal expenses
Employment contracts
Employment termination
ISSN: 1445-2782
| Date: | Version: | |
| 19 October 2001 | Original statement | |
| You are here | 13 March 2015 | Updated statement |