The Commissioner has issued a draft ruling on the income tax treatment of an amount received by a taxpayer in respect of legal costs incurred in a dispute concerning the taxpayer’s termination of employment. In this ruling the Commissioner makes it clear that:

  • if the amount is capable of being identified as relating specifically to legal costs, then such amount is not an employee termination payment (ETP) (and therefore not subject to the concessions applicable to ETPs)
  • such amount will be included in the taxpayer’s income as an assessable recoupment (to the extent that it is not assessable as income under another provision of the tax law) where the amount of the legal costs has been claimed as a deduction (in certain circumstances such legal costs may be deductible).

However where the taxpayer receives an undissected lump sum in consequence of termination of employment and that undissected that includes a component that is in respect of legal costs incurred in relation to the dispute but that component cannot be determined then the whole of the undissected lump sum will be treated as an ETP.