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20 Oct 08 Deduction for legal expenses allowed - Romanin

The Federal Court (McKerracher J) has allowed a taxpayer's appeal against the Commissioner's decision to deny a deduction, under s 8-1 ITAA 1997, for legal expenses incurred in enforcing entitlements due to him under a contract of employment that had been terminated by his employer. The amounts recovered by the taxpayer had been included in his assessable income as an ETP, and tax had been paid accordingly.

The Commissioner contended that the advantage sought in incurring the legal expenses was to secure a lump sum payment by way of relief for the summary termination of the employment contract and that it did not relate to the process of carrying out the duties which produced income under the former employment. In response, the Court said: "I find this argument difficult to accept in circumstances where the payment constitutes an enforcement of an entitlement to income, not to compensation or damages." An argument that the expense was capital or of a capital nature was also rejected: Romanin v FCT [2008] FCA 1532 (Federal Court, McKerracher J, 16 October 2008).

For a copy of the decision, go here.

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