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Edited version of your written advice

Authorisation Number: 1051432480780

Date of advice: 3 October 2018

Ruling

Subject: Work Related Expenses – Legal Fees

Question:

Are you entitled to a deduction for legal expenses incurred in an unfair dismissal claim against your former employer?

Answer:

Yes

Question:

Are you entitled to a deduction for legal expenses incurred in a claim against a workers compensation entity?

Answer:

Yes

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You were employed by Company A and were made redundant in Spring 20XX.

You engaged legal practitioners to assist you in taking legal action against the dismissal to a legal tribunal and, separately, to the Relevant Court.

Your claims against your former employer included:

Your action against your employer was settled with an agreement under which you received an amount of $X in lieu of penalties sought and $Y in payment of your legal costs.

Your claims against the workers compensation entity included:

You action was settled with an agreement under which you received $X for injuries and in payment of your legal costs.

You have provided copies of invoices from solicitors for your legal fees which are categorised as various work associated with these separate claims.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

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, or relate to the earning of exempt income.

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

Generally, legal expenses incurred in an unfair dismissal action (seeking reinstatement and/or damages) are of a capital nature and therefore, not deductible.

Paragraph five of Taxation Determination TD93/29 states:

In your case, you incurred expenses in taking legal action against your employer for unfair dismissal. Your legal action has not gone beyond a claim for revenue hence the legal costs are deductible, because they are not capital in nature.

As your legal costs were not capital in nature and therefore in accordance with Commissioners view expressed in TD 93/29 are deductible under section 8-1 of the ITAA 1997.

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