Legal fees for employment and industrial law services
Our employment lawyers work according to hourly rates. They do not operate on a 'no win, no charge basis' like some other areas of our firm. In some instances we can offer fixed fee arrangements that provide you with certainty about the potential costs associated with your claim.
Some legal costs may be tax deductible.
Tax deductibility of legal expenses
The tax deductibility of employment-related legal expenses is a complicated and evolving area of tax law. This is especially the case in relation to legal costs incurred in the preparation and administration of employment contracts and in connection with employment law disputes. The Commissioner's defeat in three recent relevant court cases may be seen to expand the circumstances in which legal costs may be deductible where the Commissioner formerly had ruled and argued that they were not.
Maurice Blackburn recommends that you obtain professional advice from your accountant about the tax treatment of legal costs incurred in relation to an employment law issue.
Romanin v Commissioner of Taxation (Romanin's Case)
Romanin v Commissioner of Taxation  73 ATR
In 2008, Mr Romanin appeared before the Federal Court in his against the Commissioner of Taxation. Mr Romanin was found to have a contractual entitlement to 12 months' notice (or pay in lieu) when he was dismissed with seven days’ notice. The Federal Court held that legal expenses incurred in pursuing proceedings in the Industrial Relations Commission of NSW for pay in lieu of notice were tax deductible.
The Commissioner argued that such legal expenses were of a capital nature because the "advantage sought" was a lump sum by way of relief for termination of his employment.
However, McKerracher held that even though the amount sought was a lump sum and even though it related to an amount owing on the termination of the contract, the legal costs incurred by Mr Romanin in doing so were deductible and that deduction was not denied as being capital or of a capital nature.
Romanin's Case extends the circumstances where legal costs incurred by an employee will be deductible. Each case should be carefully considered on its merits having regard to the decision and the action the Commissioner takes in relation to the existing rulings.
Commissioner of Taxation v Shane Day (Day's Case)
Commissioner of Taxation v Day  236 CLR
In 2008, Shane Day appeared in the High Court against the Commissioner of Taxation. The court held that a Commonwealth Customs Officer who incurred legal expenses in defending disciplinary charges under the Public Service Act 1922 (PSA) could lawfully claim the legal expenses as a tax deduction.
The majority of the High Court held in Day's Case that the legal costs incurred by Mr Day were deductible as they were incurred in the course of gaining or producing his assessable income and were not of a private or domestic nature. The Court explained that the question to be answered is whether the occasion of the outgoing was "found in" what was productive of actual or expected income.
In this case, Mr Day's position as an officer subject to the PSA obliged him to observe standards of conduct extending beyond those in performance of the tasks associated with his office and the charges were not "remote from his office" as might be the case in defending a criminal charge for "private conduct".
The Court noted that incurring of expenditure by an employee to defend a charge because it may result in dismissal may not itself be sufficient in every case to establish the necessary connection to the employment which is productive of the income and much will depend upon what was entailed in the employment and the duties which it imposes upon the employee.
The Commissioner in his Decision Impact Statement states "where employment or service is conducted on terms that standards of conduct be observed in a taxpayer's personal life on pain of dismissal or reduction in salary, legal expenses incurred in resisting civil disciplinary or legal action will be deductible."
The implications of this case are to expand the types of circumstances where legal costs may be deductible in cases where an employee takes action to defend against charges that might impact on their continued employment.
Spriggs and Riddell v Commissioner of Taxation
Spriggs v Commissioner of Taxation; Riddell v Commissioner of Taxation  239 CLR 1
In 2009, Mr Spriggs and Mr Riddell brought their case against the Commission of Taxation regarding the tax deductibility of professional fees. The case concerned two professional football players who incurred professional costs (management fees) in negotiating and administering an employment agreement (a playing contract) that formed part of a business being carried on by each of the players.
The High Court held that each professional football player carried on a business of commercially exploiting their sporting prowess and associated celebrity, which included playing activities undertaken as an employee. The Court confirmed that the fees paid by each player to a manager to negotiate a new playing contract were an allowable deduction in the circumstances where:
- the players were engaged in the business of commercially exploiting their sporting prowess and associated celebrity
- the players' businesses were well established before the management fees were incurred
- there was a synergy between playing activities and non-playing activities, each of which was an income-producing activity
- the conduct of such a business by each of the appellants was anticipated in the framework provided by the playing contracts and the various other related documents
- that framework contained numerous provisions governing the players' rights to enter contracts with third parties in order to exploit their celebrity, and
- the players each conducted the whole of his business in a commercial and business-like way, in particular by retaining a manager.
Types of Employment Law Services
- Employment contracts
- Employment contract law
- Employment contract reviews
- Breach of employment contract
- Restraint of trade
- Dismissal & redundancy
- Unfair dismissals
- Wrongful dismissals
- Redundancy entitlements
- Unfair termination
Frequently Asked Questions
Whether an expense incurred by an employee is tax deductible is generally decided by reference to section 8-1 of the Income Tax Assessment Act 1997 (ITAA).
This section provides that you can deduct from your assessable income any "loss or outgoing" to the extent that it is incurred in gaining or producing your assessable income or it is necessarily incurred in carrying on a business for the purpose of producing assessable income.
However, you cannot deduct a loss or outgoing to the extent that:
- it is of capital, or a capital nature, or
- it is of a private or domestic nature.
ATO Ruling on Income Tax and FBT Treatment of Legal Costs Incurred in Termination Disputes
Taxation Ruling 2012/8 (TR 2012/8) sets out the Commissioner of Taxation's (the Commissioner's) view on the income tax and fringe benefits tax (FBT) treatment of sums received to reimburse legal costs incurred in disputes concerning termination of employment.
On the issue of income tax, TR 2012/8 deals with whether sums received to reimburse legal costs incurred in disputes concerning termination of employment are included in assessable income either:
- because they form part of an employment termination payment (ETP), or
- as an assessable recoupment where the legal costs are deductible under section 8-1 for income tax purposes.
TR 2012/8 provides the following ATO opinion about income tax treatment:
- where part of an amount received in relation to a dispute concerning termination of employment can be identified as relating specifically to legal costs, that amount is not an ETP, or
- where a deduction for legal costs is available under s 8-1, a settlement or award in respect of legal costs will be included in the recipient's assessable income as an assessable recoupment.
However, in a dispute concerning termination of employment, where a settlement sum or a court award is received as an un-dissected lump sum amount but the component of legal costs is not separately identified, then the whole amount is deemed as being received in consequence of termination of employment and is therefore treated as an ETP and is also not deductible.
TR 2012/8 provides the following opinion about the FBT treatment of a reimbursement of legal costs in disputes concerning termination of employment:
A reimbursement of legal costs incurred in a dispute concerning termination of employment will not have a sufficient or material connection to the former employment to fall within the meaning of a 'fringe benefit' in subsection 136(1) of the FBT Assessment Act 1986.
In summary, TR 2012/8 suggests that:
- an award of legal costs (distinct from a compensation sum) in successful action for wrongful dismissal excluding rights to income is likely to not be tax deductible
- an award of legal costs (distinct from a compensation sum) in a successful action for payment of entitlements due under the employment agreement subsequent to a termination of employment is likely to be tax deductible
- receipt of a specified sum for payment or part-payment of legal costs in addition to an ex-gratia payment upon execution of a Settlement Agreement is likely to not be tax deductible, and
- an unspecified payment for legal costs included in an single, non-specified settlement payment upon execution of a Deed of Settlement is likely to be tax deductible as the entire payment is deductible.
The Commissioner's main ruling in relation to employment contracts is Taxation Ruling 2000/5 (the Ruling) which provides that the following costs incurred by an employee are allowable deductions:
- costs of drawing up an employment agreement with an existing employer to replace an award, or in accordance with the existing agreement
- costs associated with the settlement of disputes arising out of an existing employment agreement
- costs of changing the conditions of an existing employment agreement with the same employer (providing the existing agreement allows for changes) including a variation, renegotiation or upon a promotion, and
- costs of renewing or extending a fixed term employment agreement, provided the existing agreement provides for this renewal or extension.
In the Ruling the Commissioner highlights that where an employee is entering into new employment a deduction is not allowable for expenses incurred, as it is considered to be incurred at a point "too soon" to be incurred in the production of assessable income and further it is a "capital expense".