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Edited version of private advice
Authorisation Number: 1052082320305
Date of advice: 31 January 2023
Ruling
Subject: Deduction - legal expenses
Question:
Are the Legal Expenses and the Settlement payment amount deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer:
Yes.
You incurred the Legal Expenses while defending the performance of your day-to-day activities and the use of your professional skills during your former employment with Company A in relation to the preparation of the Report.
It is accepted that the Legal Expenses you incurred are sufficiently connected to your income earning activities during your employment with Company A in accordance with the principles contained in Taxation Ruling TR 2004/4.
The treatment of a settlement payment amount follows the taxation treatment of any related legal expenses.
Therefore, the Legal Expenses and the Settlement payment are deductible under section 8-1 of the ITAA 1997.
This ruling applies for the following period:
Income year ended 30 June 20XX.
The scheme commenced on:
1 July 20XX.
Relevant facts and circumstances
You have professional qualifications that you used in relation to your employment with Company A.
Party X were interested in purchasing a property (the Property) and had approached Company Z in relation to obtaining a loan.
Company A's services were engaged by Company Z to provide a report (the Report) in relation to the Property and you prepared the Report for Company A.
The Property was purchased by Party X.
Your employment with Company A ended.
The Trustees became aware of the Report and sought their own report in relation to the Property.
Party X commenced unsuccessful legal action against Company Z, and then took legal action against Company A in relation to the Report without success as Company A had become bankrupt and did not have any insurance to cover its employees.
Party X commenced legal proceedings against you in relation to the Report in which they alleged they had suffered a loss due to your conduct in the preparation of the Report. They alleged you were negligent in preparing the Report.
You engaged the services of a legal firm and incurred legal expenses (the Legal Expenses) during the ruling period in relation to the legal proceedings.
You entered into a Settlement Deed (the Deed) under which it was agreed that you would pay Party X a specified settlement amount (the Settlement payment) without any admission of liability by either party.
You do not have any professional insurance and paid the Settlement payment amount during the ruling period.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1