Private ruling: Deductibility of legal expenses
Date of advice: 16 February 2022
Published: May 2022
Ruling period: 30 June 20XX
Date scheme commenced: 14 January 20XX

Ruling: Q1: Will the legal expenses and the settlement sum paid by the Trustee of the family trust to settle a legal dispute be deductible to the Trustee under section 8-1 of the Income Tax Assessment Act 1997 ? | A1: Yes. The legal expenses and the settlement sum paid by the Trustee to settle a legal dispute will be deductible. This is on the basis there is sufficient nexus between the income earning activities of the Trust business and the expenses incurred by the Trustee. The deductions will need to be reported in the income tax return of the Trust.

Relevant facts and circumstances: The Family Trust (Trust) was established by deed in 20XX. Person A is the trustee for the Trust (Trustee). In January 20XX, the Trustee entered into an agreement (Agreement) with Company A (Franchisor), whereby the Trustee was given the right to operate a franchise outlet (Franchise Outlet), subject to making payments of franchise fees to the Franchisor. After acquiring the Franchise Outlet, the sales dropped 25% between 20XX and 20XX. In September 20XX the Franchisor assigned its rights of the Agreement to a third-party Company B. In October 20XX, the Trustee decided to close down the Franchise Outlet and had informed Company B of this decision. The Trust bank account closed shortly after the Franchise Outlet ceased trading and no further activity occurred in the Trust from October 20XX. In July 20XX, Company B issued a notice of termination of the Agreement to the Trustee and demanded payment of alleged outstanding franchise fees dating back to March 20XX. In September 20XX, Company B commenced legal proceedings (Legal Proceedings) by way of a Statement of Claim (Claim) filed with the District Court of New South Wales. The Claim stated that the Trustee had allegedly breached the Agreement and Company B was seeking the payment of invoiced amounts in relation to Royalties, Advertising and Goods and Services. The Claim also stated that Company was seeking compensation for loss and damage as a result of the alleged breach of the Agreement. In November 20XX, the Trustee engaged Lawyers to negotiate and settle the Legal Proceedings. By February 20XX, the Legal Proceedings were settled with the Trustee agreeing to pay a sum of $XX,XXX (Settlement Sum) to Company B. The Deed of Settlement (unsealed copy) between Company B and the Trusted states, inter alia, that the parties have agreed to settle all claims, actions, demands and disputes between them in relation to the Franchise Agreement, the Guarantee and the Legal Proceedings without admission to liability. The Trustee received and paid for the following tax invoices issued by their Lawyers in respect of the legal services provided in relation to the negotiation and settlement of the Legal Proceedings: • Invoice number XX for $XXX • Invoice number XX for $XXX • Invoice number XX for $XXX. The Trustee also received and paid for an invoice from another Lawyer for $XX in relation to the provision of initial advice.

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