Private ruling: Legal expenses
Date of advice: 30 September 2025
Published: 17 November 2025
Ruling period: 1 July XXXX to 30 June XXXX

Ruling: Q1: Is the Taxpayer entitled to claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for legal expenses incurred with respect to defending itself against claims made by Individual A and Individual B? | A1: Yes

Relevant facts and circumstances: The Taxpayer carries on a business. Individual A had a management role in the Taxpayer and Individual B was an employee of the Taxpayer. Individuals A and B disagreed with the restructure management and employees roles within the Taxpayer an refused to accept their new roles. The Taxpayer made their positions redundant. The Taxpayer incurred legal costs in defending itself against Individual A and Individual B's claims. The expenses covered solicitor's fees for various legal activities including preparing briefs, filing claims.

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

Reasons for decision: Summary: All of the legal expenses incurred by the Taxpayer will give rise to a deduction under section 8-1 of the ITAA 1997. | Detailed Reasoning - The income tax treatment of legal expenses: The Taxpayer carries on a business. The Taxpayer incurred the legal expenses with respect to Individual A and Individual B's actions against the Taxpayer as it relates to the restructure of the company and Legal expenses tend to be of an income nature, when incurred for purposes that relate to the process by which assessable income of a non-capital nature is derived, such as the manner in which the taxpayer carries out their employment duties or conducts their business. Relevantly, in these circumstances, the legal expenses: a) have a sufficient connection with the operations or activities by which the Taxpayer gains or produces its assessable income as they arose out of the day-to-day activities of its business and in dealing with a normal incident to which it had been exposed in the day to day conduct of its business; and b) they are of an income nature as they are incurred for the purpose of defending Taxpayer against claims made by Individual A and Individual B regarding the restructure of management and employee roles within the Taxpayer affecting their employment roles in Taxpayer and their unfair dismissal claims (as their positions were made redundant). Consequently, the Taxpayer's legal expenses are deductible under section 8-1 of the ITAA 1997.

Does IVA apply to this private ruling?: Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement. | If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website ato.gov.au/gaar .