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Edited version of private advice
Authorisation Number: 1052063041278
Date of advice: 25 November 2022
Ruling
Subject: Legal expenses
Question
Are you entitled to a deduction for the legal expenses that are not related to compensation?
Answer
Yes.
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for a loss or outgoing to the extent that it is incurred in gaining or producing your assessable income. You are not entitled to a deduction where the expenses are capital, private or domestic in nature, or incurred in gaining exempt income.
In your case the portion of your legal expenses incurred in considering and/or seeking compensation is capital in nature. Therefore, a deduction is not allowable for those expenses.You are entitled to a deduction for legal expenses if they are incidental to the production of your assessable income. In your case most of your legal expenses related to defending allegations about the manner in which you communicated with staff in the conduct of your work duties and the work demands you placed on them. As the legal expenses that you incurred in responding to the investigation are incidental to the production of your assessable income, you are entitled to a deduction for those legal expenses. The apportionment of your legal expenses that you have put forward is considered reasonable.
This ruling applies for the following periods:
Year ended 30 June 20YY
Year ended 30 June 20YY
The scheme commences on:
1 July 20YY
Relevant facts and circumstances
You are employed and derive your assessable income from this employment.
You were informed by your employer that allegations had been made against you about your conduct in your dealings with other employees.
The allegations related to the manner in which you communicated with staff in the conduct of your work duties and the work demands you placed on them.
You engaged a lawyer to represent you in responding to the allegations and the investigation.
After a period, you were informed that the investigation was being discontinued.
Most of the invoices from your lawyer was for work undertaken in representing you during the investigation.
The final invoice included costs for some work undertaken after the investigation was discontinued that related to considering and/or seeking compensation
Your contentions
Costs for work performed before DD MM YYYY including some work outlined on invoice XXXXX are fully deductible as the work related to responding to the investigation.
Costs for work performed on DD MM YYYY as outlined on invoice XXXXX is not deductible as it is related to seeking compensation which it is accepted is a matter that is capital in nature.
Costs for work performed after DD MM YYYY as outlined on invoice XXXXX, is X% deductible as it is partly related to responding to the investigation and partly seeking compensation.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1