ATO Interpretative Decision

ATO ID 2002/657 (Withdrawn)

Income Tax

• Status of this decision:
  This interpretative decision is currently being reviewed as a result of a recent court/tribunal decision. Refer to Decision Impact Statement : Romanin v Commissioner of Taxation (WAD 19/2008).However, the decision continues to represent the Tax Office view on this issue unless or until it is withdrawn.
  This ATOID is withdrawn because genuine redundancy payments are in whole or part non-assessable non-exempt income. Where an amount is included in assessable income, the interpretative issue is covered in Taxation Determination TD 93/29.
  This document has changed over time. View its history.

Issue

Is the taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for legal expenses incurred in seeking a better redundancy package?

Decision

No. The taxpayer is not entitled to a deduction under section 8-1 of the ITAA 1997 for legal expenses incurred in seeking a better redundancy package.

Facts

The taxpayer was made redundant from their employment.

The taxpayer considered that the terms of severance proposed by their employer were unfair.

The taxpayer incurred legal expenses in hiring a lawyer to successfully negotiate better terms of severance.

The taxpayer received an increased redundancy package from their employer.

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, or relate to the earning of exempt income.

In determining whether a deduction for legal expenses is allowed 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. 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.

A redundancy payment, being compensation for the loss of the expectation of continuity of service, is a payment that is capital in nature. The payment is made to compensate the taxpayer for the loss of their employment position (Case Y24 91 ATC 268; AAT Case 6942 (1991) 22 ATR 3184).

Redundancy payments are treated as eligible termination payments and subject to special tax treatment that may result in some or all of the amount being included in the taxpayer's assessable income. However the fact that a capital payment is specifically brought to account as assessable income will not change the nature of the payment. An amount that is capital in nature will remain capital notwithstanding that it is specifically included in the assessable income of the taxpayer.

The redundancy payment received by the taxpayer is capital in nature and consequently the legal expenses incurred in obtaining the redundancy payment are also capital in nature. Accordingly, no deduction is allowable under section 8-1 of the ITAA 1997 for the legal expenses incurred by the taxpayer.

Year of income:  Year ended 30 June 2001

Legislative References:
Income Tax Assessment Act 1997
   section 8-1

Case References:
Hallstroms Pty Ltd v. Federal Commissioner of Taxation
   (1946) 72 CLR 634
   (1946) 3 AITR 436
   (1946) 8 ATD 190

Related ATO Interpretative Decisions
ATO ID 2001/667
ATO ID 2002/656

Keywords
Bona fide redundancy payments
Deductions & expenses
Eligible termination payments
Legal action
Legal expenses

Business Line:  Small Business/Individual Taxpayers

Date of publication:  25 June 2002

ISSN: 1445-2782