Private ruling: Legal expenses
Date of advice: 18 July 2025
Published: 15 September 2025
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: XX XXXX 20XX

Ruling: Q1: Are the legal expenses you incurred in the 20XX income year of $XX, tax deductible? | A1: Yes. | Q2: Are the legal expenses you incurred before XX XXXX 20XX of $XX tax deductible? | A2: Yes. | Q3: Are the legal expenses you incurred after XX XXXX 20XX of $XX tax deductible? | A3: No.

Relevant facts and circumstances: On XX XXXX 20XX, you registered with Agency A. This is a registration required for your employment as a position A. On XX XXXX 20XX, you commenced permanent employment with Employer A as a senior position A. You worked X days per week at Employer A. On XX XXXX 20XX, you commenced employment with Employer B, a disability support service as a senior position A. You worked X days per week at Employer B. On XX XXXX 20XX, you and Employer A had a meeting in accordance the Managing Unsatisfactory and Substandard Performance Policy, where you were advised of a number of performance concerns. In this meeting you were informed that, if your performance did not improve within 28 days of receiving the follow up letter, that a Performance Improvement Plan (PIP) may be implemented. The following performance concerns were discussed in the meeting: • Patient Management / Clinical Scope • Time Management • Infection Control • Communication • Working as a team • Senior Responsibilities On XX XXXX 20XX, you received a letter from Employer A confirming what was discussed in the meeting on XX XXXX 20XX. The letter additionally included the outcomes of potentially failing to meet the requirements of the PIP. On XX XXXX 20XX, you received a letter from Employer A that you were going to be put on a Performance Improvement Plan (PIP) for a XX-month period. On XX XXXX 20XX, Employer A informed you that your performance issues had escalated, and they were temporarily altering the scope of your duties so that you were not undertaking direct patient care without supervision. Employer A stated that they have been unable to identify meaningful duties which do not involve direct patient care, and therefore it has been determined that you are not required to attend the workplace for your rostered shifts until appropriate duties have been identified. You continued to be remunerated to ensure that there will be no financial impact to you as a result of this decision For a period, you were restricted to non-clinical duties. On XX XXXX 20XX, Employer A submitted a notification to Agency A regarding your substandard performance. The complaint stated the following concerns: • Patient Management / Clinical Scope • Time Management • Infection Control • Communication • Working as a team • Senior Responsibilities As stated in Employer A's notification to Agency A, you remained employed by the health service but were redeployed to the Safety and Quality department, to assist with non-patient facing roles, such as auditing. On XX XXXX 20XX, you returned to your substantive position. On XX XXXX 20XX, Employer A informed you that your performance continued to be unsatisfactory and that they planned to proceed to implement the PIP. On XX XXXX 20XX, Lawyers A sent you a Client Cost Agreement regarding the Agency A investigation. On XX XXXX 20XX, you transferred $XX to Lawyer A's trust account. On XX XXXX 20XX, Lawyer A assisted you in preparing a letter to Agency A to respond to the notification on XX XXXX 20XX. On XX XXXX 20XX, Lawyer A issued you a bill for $XX regarding the Agency A investigation. On XX XXXX 20XX, Employer A informed you that the PIP would be implemented for XX-months from XX XXXX 20XX. On XX XXXX 20XX, Lawyer A processed payment of $XX from the trust account funds regarding the Agency A investigation. On XX XXXX 20XX, your Employer A supervisor informed you that you had not made considerable improvement and have not successfully met the PIP outcomes for satisfactory performance. On XX XXXX 20XX, Employer A requested you to write a reflective practice report via email. On XX XXXX 20XX, you contacted Lawyer A requesting assistance with the reflective practice report. On XX XXXX 20XX, Employer A issued you a letter, directing you not to attend the workplace for your rostered shifts effective immediately. The decision was made following the performance concerns being raised in your direct patient care and clinical practice. You were informed that you were required to be supervised and because the supervisor was no longer available to mitigate the risk to patient safety, they could no longer accommodate you in the workplace. During this time, you remained on full pay pending an outcome of your performance review. On XX XXXX 20XX, Lawyer A sent you another Client Cost Agreement regarding the Agency A investigation. On XX XXXX 20XX, Lawyer A sent you a Client Cost Agreement regarding your employment matter. On XX XXXX 20XX, Lawyer A supported you in preparing a reply letter to Employer A in regard to your substandard performance. On XX XXXX 20XX, you transferred $XX to Lawyer A's trust account regarding your employment matter. On XX XXXX 20XX, you transferred $XX to Lawyer A's trust account regarding the Agency A investigation. On XX XXXX 20XX, Lawyer A assisted you in preparing a letter to Employer A in reply to the letter dated XX XXXX 20XX. On XX XXXX 20XX, Lawyer A assisted you in preparing the Reflective Practice Report to Agency A for their investigation. On XX XXXX 20XX, Lawyer A issued you a bill for $XX regarding the employment matter. On XX XXXX 20XX, Lawyer A processed payment of $XX from the trust account funds regarding the employment matter. On XX XXXX 20XX, Employer A responded to Lawyer A's letter from XX XXXX 20XX, and they reiterated that your performance was substandard and that you were directed to not attend the workplace. On XX XXXX 20XX, you transferred $XX to Lawyer A's trust account regarding your employment matter. On XX XXXX 20XX, Lawyer A issued you a bill for $XX regarding the Agency A investigation. Lawyer A processed payment of $XX from the trust account funds, which left an outstanding balance of $XX. On XX XXXX 20XX, you replied to the feedback by Employer A that you had not made considerable improvement. On XX XXXX 20XX, Lawyer A issued you a bill for $XX regarding the employment matter. On XX XXXX 20XX, Agency A proposed to implement a condition in your Podiatry professional registration, that you could only practice under supervision. On XX XXXX 20XX, Lawyer A spoke to Employer A on your behalf. Employer A advised the lawyer that you did not make improvement in your work performance. On XX XXXX 20XX, Lawyer A processed payment of $XX from the trust account funds regarding the employment matter. On XX XXXX 20XX, you sent a letter to Agency A accepting the condition of having supervision for the next XX months at both Employer A and Employer B. On XX XXXX 20XX, Agency A implemented the supervised practice condition on your registration. On XX XXXX 20XX, you received from Agency A a monitoring of compliance letter. For a period, you continued to practice at Employer B unsupervised. On XX XXXX 20XX, Lawyer A issued you a bill for $XX, this was in addition to the outstanding balance of $XX, you owed. There was an outstanding balance of $XX owed regarding the Agency A investigation. On XX XXXX 20XX, you received a letter and a call from Agency A seeking information to assist them in assessing your compliance with the restrictions on your registration. The conditions on your registration required that you only practise as a Position A under the supervision of an approved supervisor. On XX XXXX 20XX, you were stood down without pay from the Employer B pending an investigation into why you continued to practise without an approved supervisor at that location. On XX XXXX 20XX, you made a direct payment of $XX to Lawyer A to pay the outstanding balance regarding the Agency A investigation. On XX XXXX 20XX, you replied to Agency A's letter dated XX XXXX 20XX after receiving advice from Lawyer A. You stated that you did not receive the letter dated the XX XXXX 20XX until the XX XXXX 20XX and you did not understand that you had to cease practice immediately on XX XXXX 20XX and that there was no grace period to put things in place for clients. On XX XXXX 20XX, you received a letter from Employer B regarding your non-compliance with your Agency A registration. Your employment was terminated effective of XX XXXX 20XX due to your misconduct and breaching your employment contract. On XX XXXX 20XX, you advised Lawyer A that you did not want to negotiate further with Employer B about the termination. On XX XXXX 20XX, you received a letter from Agency A that stating that no regulatory action is required regarding you practising at Employer B without supervision. On XX XXXX 20XX, Lawyer A issued you a bill for $XX regarding the employment matter. The bill was for legal advice on responding and complying with Agency A requirements (to avoid losing my Agency A registration); and to negotiate for continuation of your employment with the Employer A. You made a direct payment of $XX on the same day to Lawyer A to pay the outstanding balance. On XX XXXX 20XX, you received a letter from Employer A stating they were seeking to terminate your employment with notice. They cited that you have not demonstrated considerable improvements and have not met the PIP outcomes specifically but not limited to, patient management and clinical scope, time management, infection control and communication. After XX XXXX 20XX, Lawyer A had a without prejudice discussion with HR at Employer A. They asked HR whether they would avoid keeping a permanent record of your poor performance on the government health agency database if you were to resign with immediate effect (instead of giving 4 weeks' notice). Lawyer A recommended resignation over termination, to avoid having a poor performance record that would prevent you from gaining employment with the department of health in future. On XX XXXX 20XX, Lawyer A issued you a bill for $XX regarding resigning from your employment. On XX XXXX 20XX, you sent an email to Employer A resigning from your position. On XX XXXX 20XX, you made a direct payment of $XX to Lawyer A to pay the outstanding balance regarding the employment matter. On XX XXXX 20XX, you sent a letter to Employer A confirming your resignation. On XX XXXX 20XX, Employer A confirmed your resignation and that your last day of employment would be XX XXXX 20XX. On XX XXXX 20XX, Lawyer A issued you a bill for $XX regarding resigning from your employment. On XX XXXX 20XX, you made a direct payment of $XX to Lawyer A to pay the outstanding balance regarding the employment matter. On XX XXXX 20XX, you worked your final day with Employer A. You will not incur further legal expenses relating to this matter.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1

Reasons for decision: Detailed Reasoning - Questions 1 & 2: You have demonstrated the legal expenses directly related to your employment and a matter that was directly related to your daily work duties. Your legal expenses follow the advantage sought and, in this case, will be an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 , as they have the necessary connection with your employment and are neither capital nor private in nature. | Detailed Reasoning - Question 3: The advantages you were seeking were regarding the cessation of your employment and are capital in nature. As no deduction is allowed for expenses that relate to items of a capital nature, you cannot claim a deduction for these legal expenses you incurred. | Detailed Reasoning - Detailed reasoning: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except to the extent the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. A deduction for legal expenses by an employee depends on the particular facts of a case. For legal expenses to constitute an allowable deduction, it must be shown that they were incidental or relevant to the production of the taxpayer's assessable income, ( Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; [1949] HCA 15; (1949) 4 AITR 236; (1949) 8 ATD 431). In determining whether a deduction for legal expenses is allowed under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered ( Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 3 AITR 436; (1946) 8 ATD 190). The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses. If the advantage to be gained is of a revenue nature, then the expenses incurred in gaining the advantage will also be of a revenue nature. When the principal reason for incurring the legal expenses is defending the actions of the taxpayer in carrying out their employment duties through which they gain or produce assessable income, such expenses are characterised as being of a revenue nature and are deductible ( Inglis v. FC of T 87 ATC 2037; and Case V116 88 ATC 737; AAT Case 4502 (1988) 19 ATR 3703). Furthermore, legal expenses are generally deductible if they arise out of the day to day activities of the taxpayer's business (Herald and Weekly Times Ltd v. Federal Commissioner of Taxation (1932) 48 CLR 113; (1932) 39 ALR 46; (1932) 2 ATD 169) and the legal action has more than a peripheral connection to the taxpayer's income producing activities ( Magna Alloys and Research Pty Ltd v. FC of T (1980) 49 FLR 183; (1980) 11 ATR 276; 80 ATC 4542). In FC of T v. Day [2008] HCA 53 and FC of T v. Rowe (1995) 31 ATR 392; 95 ATC 4691, the courts accepted that legal expenses incurred in defending the manner in which a taxpayer performed his employment duties were allowable. As per paragraph 2 of Taxation Ruling TR 2000/5 Income tax and fringe benefits tax: costs incurred in preparing and administering employee agreements , where legal expenses incurred are associated with settlement of disputes arising out of an existing employment agreement a taxpayer will be entitled to a deduction under section 8-1 of the ITAA 1997 for the cost of representation. At paragraph 12, the ruling recognises the types of costs that may be incurred in administering an employment agreement, including costs relating to the settlement of disputes. Similarly, in ATO Interpretive Decision ATO ID 2001/27 Income Tax: Deductions and expenses: Legal expenses in course of employment , the taxpayer, as part of their employment duties, was instructed to write a paper. Subsequently, the taxpayer was reprimanded for comments included in the paper. The taxpayer, being concerned about the possibility of being dismissed from the position as a result of the comments, sought legal advice. The taxpayer incurred legal expenses in defending themself against criticism of the taxpayer's work practices. The evidence indicated that, in carrying out the actions that led to the criticism, the taxpayer was doing no more than executing their employment duties. Consequently, the legal expenses incurred were an allowable deduction. Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions provides the Commissioner's opinion on whether the word 'incurred', in section 8-1 of the ITAA 1997, has the same meaning for taxpayers who return their income on a receipts basis as it does for those taxpayers who generally return their income on an earnings basis. Paragraph 6 and 21 of TR 97/7 provide a discussion on when a legal expense is incurred and states: 6. The courts have been reluctant to attempt an exhaustive definition of a term such as 'incurred'. The following propositions do not purport to do this, they help to outline the scope of the definition. The following general rules, settled by case law, assist in most cases in defining whether and when a loss or outgoing has been incurred: a) a taxpayer need not actually have paid any money to have incurred an outgoing provided the taxpayer is definitively committed in the year of income. Accordingly, a loss or outgoing may be incurred within section 8-1 even though it remains unpaid, provided the taxpayer is 'completely subjected' to the loss or outgoing. That is, subject to the principles set out below, it is not sufficient if the liability is merely contingent or no more than pending, threatened or expected, no matter how certain it is in the year of income that the loss or outgoing will be incurred in the future. It must be a presently existing liability to pay a pecuniary sum; b) a taxpayer may have a presently existing liability, even though the liability may be defeasible by others; c) a taxpayer may have a presently existing liability, even though the amount of the liability cannot be precisely ascertained, provided it is capable of reasonable estimation (based on probabilities); d) whether there is a presently existing liability is a legal question in each case, having regard to the circumstances under which the liability is claimed to arise; e) in the case of a payment made in the absence of a presently existing liability(where the money ceases to be the taxpayer's funds) the expense is incurred when the money is paid. | Detailed Reasoning - Payments made in the absence of a presently existing pecuniary liability: 21. Generally, a deduction is allowable because a liability arises necessitating the payment of an expense. However, some payments are not necessitated by a presently existing pecuniary liability, and they are incurred only upon payment. Examples of such expenses include gifts, insurance premiums, licence renewals and motor vehicle registration fees - these payments are at the discretion of the taxpayer, if the taxpayer wants those benefits. | Detailed Reasoning - When the expenses were incurred: TR 97/7 provides clarification that a taxpayer does not need to have paid the expense to have 'incurred' it. The expense is incurred when the taxpayer is definitively committed to the liability. If the money is paid to a trust account but no bill has been issued, the taxpayer is not yet committed to the expense and by result the expense is not incurred at this point. Once the lawyer issues the bill and the taxpayer becomes liable, the expense is incurred, even if payment is made at a later date from the trust account. Therefore, the date Lawyer A issued you the bill for their services, you became committed to the expense. The following expenses were incurred in the 20XX income year: • $XX bill issued for employment matter • $XX bill issued for employment matter • $XX bill issued for the investigation • $XX bill issued for the investigation • $XX bill issued for the investigation The following expenses were incurred in the 20YY income year: • $XX bill issued for employment matter • $XX bill issued for employment matter • $XX bill issued for employment matter Below is a discussion on your eligibility to claim the expenses as a deduction. | Detailed Reasoning - Expenses incurred before XX XXXX 20XX - Employment matter: The purpose of your legal expenses was to receive legal advice in relation to the PIP your employer wanted to implement. Your intention was to safeguard your employment role. It was not to seek compensation or cease your employment when the legal advice was received. The allegations directly related to your daily work duties in which you derived your assessable income. The cost of seeking legal advice in relation to the PIP is a cost incurred in administering the employment agreement in place between you and your employer. Specifically, it relates to ensuring your rights were protected in the dispute that has arisen between the parties regarding your performance as an employee, and in this sense was incurred to safeguard your employment. You also incurred legal expenses in defending yourself against criticism of your work practices, which led to implementation of the PIP. The evidence indicated that, in carrying out the actions that led to the criticism and implementation of the PIP, you were doing no more than executing your employment duties. Consequently, the legal expenses incurred will be an allowable deduction. Therefore, you have demonstrated the legal expenses directly related to your employment and a matter that was directly related to your daily work duties. Your legal expenses follow the advantage sought and, in this case, will be an allowable deduction under section 8-1 of the ITAA 1997, as they have the necessary connection with your employment and are neither capital nor private in nature. | Detailed Reasoning - Expenses relating to the investigation: The purpose of your legal expenses was to receive legal advice in relation to your employer's notification to Agency A. Your intention was to safeguard your employment role. It was not to seek compensation or cease your employment when the legal advice was received. The allegations directly related to your daily work duties in which you derived your assessable income. The cost of seeking legal advice in relation to the investigation is a cost incurred in fulfilling your requirements to maintain your current registration. Specifically, it relates to ensuring your rights were protected in the dispute that has arisen between the parties regarding your performance as an employee, and in this sense was incurred to safeguard your employment. The notification was a result of you doing no more than executing your employment duties. Consequently, the legal expenses incurred will be an allowable deduction. Therefore, you have demonstrated the legal expenses directly related to your employment and a matter that was directly related to your daily work duties. Your legal expenses follow the advantage sought and, in this case, will be an allowable deduction under section 8-1 of the ITAA 1997, as they have the necessary connection with your employment and are neither capital nor private in nature. | Detailed Reasoning - Expenses incurred after XX XXXX 20XX - Employment matter: On XX XXXX 20XX, you received a letter from Employer A stating they were seeking to terminate your employment with notice. The advantages you were seeking were regarding the cessation of your employment and are capital in nature. As no deduction is allowed for expenses that relate to items of a capital nature, you cannot claim a deduction for these legal expenses you incurred. You are therefore not eligible for a deduction for the expenses: • $XX bill issued for employment matter • $XX bill issued for employment matter