1051629548931 | Legal database

Disclaimer
This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of private advice

Authorisation Number: 1051629548931

Date of advice: 3 February 2020

Ruling

Subject: Income tax - legal fees

Question 1

Are you entitled to claim a deduction for legal expenses incurred in defending a matter that originated in your former workplace?

Answer

Yes.

Section 8-1 of the Income Tax Assessment Act 1997 allows for a deduction for a loss or outgoing to the extent that it is incurred in gaining or producing your assessable income.

Accordingly, you are entitled to a deduction under section 8-1 of the ITAA 1997 for legal expenses you incurred to defend your actions in your workplace.

These legal fees are incurred in gaining and producing your assessable income and will allow you to continue to work in the same profession.

Additionally, the legal fees sufficiently relate to your professional conduct and day to day employment duties.

Question 2

Are you entitled to claim a deduction for payments incurred to settle the matter (out of court) that originated in your former workplace?

Answer

Yes.

Section 8-1 of the Income Tax Assessment Act 1997 allows for a deduction for a loss or outgoing to the extent that it is incurred in gaining or producing your assessable income.

Accordingly, you are entitled to a deduction under section 8-1 of the ITAA 1997 for payments incurred to settle the matter (out of court).

These settlement payments are incurred in gaining and producing your assessable income and will allow you to continue to work in the same profession.

Additionally, the settlement payments sufficiently relate to your professional conduct and day to day employment duties.

This ruling applies for the following periods:

Year ending 30 June 20XX

The scheme commences on:

XX September 20XX

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You work as a professional in a specific industry.

You have incurred legal expenses in order to defend a legal claim that has been brought against you and your former employer, 'Company ABC' that allegedly occurred back in 20XX.

The claim is made by a former client who allegedly suffered a loss as a result of advice provided by yourself as an employee of 'Company ABC'.

'Company ABC' was placed into liquidation in 20XX and as a result the plaintiff of the claim was not able to make a claim through the company's professional indemnity insurance policy as it was "Claims Made" policy meaning that any claims would need to have been made during the time the policy was in place.

Furthermore 'Company ABC' had no "Run Off" cover as part of its professional indemnity insurance that would enable the plaintiff to make a claim after 'Company ABC' was placed into liquidation.

Given the plaintiff was not able to make a claim through the company's indemnity insurance policy they are now pursuing both yourself and a former employer personally to recoup alleged losses sustained.

Furthermore, your current indemnity insurance policy does not cover retrospective claims so it cannot be accessed to cover any sustained legal costs with regards to this matter.

You are now self-employed as a professional in this specific industry.

You are incurring these legal expenses to defend your ability to continue to working as a professional and therefore gaining and producing assessable income.

Legal fees incurred for the financial year ending 30 June 20XX are approximately $XX.

Legal fees incurred in the current financial year since 1 July 20XX are currently approximately $XX.

You are seeking to settle the matter before the matter progresses to court to avoid further costly legal expenses.

You attended mediation with the plaintiff in 20XX. An agreement to settle the matter included the following terms: $XX to be paid in three instalments of $XX each at XX day intervals commencing XX days from the signing of the settlement paperwork.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Copyright notice

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).