Private ruling: Income tax - legal fees
Date of advice: 3 February 2020
Published: March 2020
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: XX September 20XX

Ruling: Q1: Are you entitled to claim a deduction for legal expenses incurred in defending a matter that originated in your former workplace? | A1: 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. | Q2: Are you entitled to claim a deduction for payments incurred to settle the matter (out of court) that originated in your former workplace? | A2: 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.

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