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Edited version of private advice
Authorisation Number: 1051745199918
Date of advice: 03 September 2020
Ruling
Subject: Deductibility of legal and settlement expenses
Question
Are your legal expenses and the settlement payment deductible?
Answer
Yes. As the legal expenses arose out of the day to day activities of your business and can be reasonably seen as necessary or appropriate in pursuit of your business objectives in earning assessable income they are deductible under section 8-1 of the Income Tax Assessment Act 1997. The taxation treatment of the settlement amount follows the treatment of the legal expenses incurred in relation to the dispute. As such, the settlement payment is also deductible.
This ruling applies for the following periods
Year ended 30 June 2018
Year ended 30 June 2019
The scheme commences on
1 July 2017
Relevant facts and circumstances
You carry on a construction business.
You were engaged by the owners of a property to build an extension/renovate the building on the property.
The owners requested a number of variations and changes during the building works which meant additional costs and time.
Towards the end of the construction the owners alleged that there were defects in the work.
All work was completed by DDMMYYYY including all defect work and the Practical Completion certificate was issued.
The total construction costs of this project came to $X. You have included this amount in your assessable income.
The total amount you received from the owners for the work was $Y.
The owners lodged an application with a Tribunal alleging that there was a huge list of defects that were not rectified. You lodged a counter claim for non-payment of your final invoice.
During a mediation conference you and the owners agreed to a settlement of the proceeding and the dispute.
Under the terms of the settlement you agreed to pay the owners $A (settlement payment).
You paid $X for legal assistance in relation to the dispute (legal expenses).
You account for your income on an accrual basis.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1
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