Private ruling: Legal expenses
Date of advice: 27 October 2025
Published: 15 December 2025
Ruling period: 1 July XXXX to 30 June XXXX

Ruling: A1: Yes | Q1: Is the Taxpayer entitled to claim a deduction under section 8-1 of ITAA 1997 for legal expenses incurred in taking legal action in respect of defamation? | A2: No | Q2: Is the Taxpayer entitled to claim a deduction under section 40-880 of ITAA 1997 for legal expenses incurred in taking legal action in respect of defamation? | A3: Yes - to the extent it relates to protecting the goodwill of the Taxpayer's business. | Q3: Do the legal expenses that relate to the defamation matter, to the extent they relate to casual employment, form part of the cost base of a CGT asset for the purposes of Parts 3-1 and 3-3 of the ITAA 1997? | A4: No | Q4: Are the Taxpayer's legal expenses assessable recoupments for the purposes of Division 20 of the ITAA 1997? | A5: Yes - to the extent the Taxpayer is entitled to a deduction under section 40-880 of the ITAA 1997 for legal expenses incurred to protect the goodwill of the Taxpayer's business.

Relevant facts and circumstances: In XXXX the Taxpayer was a partner in a partnership. On XXXX the Taxpayer retired from the partnership. Under the terms of his contract the Taxpayers was to receive post-termination entitlements for X years. The Taxpayer has returned the full amount of post termination payments as ordinary income in his income tax returns for the X income years. From XXXX through to XXXX the Taxpayer had casual employment. There was no right of renewal upon completion of the employment period. If further work was required a new contract would be entered into for a new employment period. The Taxpayer returned the salary he received as assessable income in his income tax returns. Since XXXX to date the Taxpayer has practiced full time in his profession and intends to continue in full time practice for the foreseeable future. The Taxpayer carries on a business. In XXXX the partnership unilaterally determined that the Taxpayer was not entitled to post termination payments and ceased payments. The Taxpayer is seeking to enforce his contractual entitlement which relates to the payment of the post termination amounts- being amounts that are returned as assessable income. The Taxpayer is seeking the payment of amounts to which he is entitled under his contract. Statements were made by various entities that the Taxpayer considered defamatory. The Taxpayer was not seeking damages. The Taxpayer was only seeking apology/corrections and contribution towards his legal expenses. The Taxpayer was concerned The Taxpayer was concerned that these statements would affect his reputation - affecting his business and future casual employment opportunities. The Taxpayer incurred legal expenses with respect to the post termination and defamation matters.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 40-880 | Income Tax Assessment Act 1997 Division 20

Reasons for decision: Summary: The legal expenses that relate to the post termination matter are deductible under section 8-1 of the ITAA 1997. The legal expenses that relate to defamation matter, to the extent they relate to the Taxpayer's business, will give rise to deductions under section 40-880 of the ITAA 1997. The legal expenses that relate to defamation matter, to the extent they relate to casual employment are not deductible under section 8-1 of the ITAA 1997. Furthermore, the expenditure is not dealt with under the CGT provisions (such that it forms part of the cost base of any asset held by the Taxpayer), nor does give rise to a deduction under section 40-880 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Legal expenses that relate to the post termination matter The principles in Romanin v FC of T [2008] FCA 1532 are relevant to legal action undertaken to enforce an entitlement to income that is contractually owed to a taxpayer (but not to compensation or damages for loss of an income earning capacity). In this case, the Taxpayer was seeking to enforce his entitlement to PTP that he contends he was entitled to pursuant to his employment contract - the payments in question being his remaining pension entitlements that, if paid to him, would be included in his assessable income and that arose as a consequence of the services he provided to his employer. Relevantly, in these circumstances, the legal expenses that relate to the PTP claim: a) have the necessary connection to the production of assessable income; and b) are not private, domestic or capital. Consequently, the legal expenses that relate to the post termination matter are deductible under section 8-1 of the ITAA 1997. Legal expenses that relate to the defamation matter It is noted that no part of the expenditure was incurred by the Taxpayer with a view to seeking compensation for any damage to his personal reputation. | Detailed Reasoning - Business: 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. In these circumstances, the legal expenses that relate to the defamation matter, to the extent they relate to the Taxpayer's business, were incurred too soon - there is no actual income to which the expenses relate. Rather the legal expenses are incurred on capital account - they serve to preserve the value of his existing personal goodwill so they go to his ability to earn income rather than the actual earning of income. Consequently, the legal expenses that relate to defamation matter are not deductible under section 8-1 of the ITAA 1997. However, as the legal expenses neither create nor enhance the taxpayer's goodwill, but merely attempt to preserve it, the expenses cannot be included in the cost base of the Taxpayer's capital assets, particularly the goodwill pertaining to his private legal practice. Relevantly, subsection 110-25(5A) of the ITAA 1997 excludes expenditure incurred to preserve goodwill. The expenditure incurred is not dealt with under the CGT provisions and was not incurred on revenue account. The expenditure that was incurred in preserving the goodwill of the business (i.e. private legal practice) falls within the ambit of section 40-880 of the ITAA 1997. Consequently, to the extent the legal expenses incurred by the Taxpayer with respect to the defamation matter relate to his business, they will give rise to deductions under section 40-880 of the ITAA 1997. | Detailed Reasoning - Casual employment: Relevantly, in these circumstances, the legal expenses that relate to the defamation matter - to the extent they relate to casual employment: a) do not have a sufficient connection with the Taxpayer's existing income earning activities as they are incurred prior to, i.e. at a point too soon; and b) to the extent they are incurred in preserving the taxpayer's reputation as a private citizen, are of a private nature. It is noted that in this context that the Taxpayer's personal reputation is not a CGT asset, and it does not relate to personal goodwill attached to a business being carried on by the Taxpayer (in contrast with his personal goodwill with respect to his business). Consequently, the legal expenses that relate to the defamation matter, to the extent they relate to future employment opportunities, are not deductible under section 8-1 of the ITAA 1997. Furthermore, the expenditure is not dealt with under the CGT provisions, nor does give rise to a deduction under section 40-880 of the ITAA 1997. | Summary: To the extent the legal expenses incurred by the Taxpayer with respect to the defamation matter relate to preserving the goodwill of his business, those amounts will be an assessable recoupment for the purposes of Subdivision 20-A of the ITAA 1997. | Detailed Reasoning - Assessable recoupment: Subdivision 20-A of the ITAA 1997 provides that an amount, to the extent that it is not ordinary income or statutory income, is an assessable recoupment where that amount is received by way of insurance or indemnity and the taxpayer can deduct an amount for the loss or outgoing in the current year or an earlier year under any provision of the income tax law, or where that amount is received as a recoupment of a loss or outgoing and the taxpayer can deduct an amount for the loss or outgoing in the current year or an earlier year under a specified provision. To the extent the legal expenses incurred by the Taxpayer with respect to the defamation matter relate to his private legal practice, giving rise to deductions under section 40-880 of the ITAA 1997, those amounts will be assessable recoupments for the purposes of Subdivision 20-A of the ITAA 1997.

Subject: Legal expenses: 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 in taking legal action in respect of post-termination entitlements? | 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 .