Private ruling: Legal expenses - novated lease
Date of advice: 23 October 2025
Published: 8 December 2025
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are legal fees incurred in defending a claim made by a finance company, where the finance agreement was established through an employer-endorsed salary packaging arrangement and the employer is listed as guarantor, deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). | A1: No. The legal expenses incurred in relation to the novated lease dispute are not deductible under section 8-1 of the ITAA 1997. The dispute arose after the leased vehicle was written off in a private accident and found to be uninsured, leading to a claim for default under the lease. Although the lease was part of a salary packaging arrangement, the expenses relate to personal financial liability and do not have a sufficient connection to the derivation of assessable income.

Relevant facts and circumstances: On DD MM YYYY, you began working for your current employer and have confirmed that you remain employed there. Novated Lease On DD MM YYYY, you signed a salary packaging agreement which your employer had made available to you through a salary packaging provider (the salary packing provider). The salary packaging provider agreement included payment schedules in the contract that broke down the amounts to be deducted from your salary. These were presented in both annual and fortnightly budget tables. The agreement included all the running costs as part of the arrangement. On DD MM YYYY, shortly after executing the agreement, you received an email from the salary packaging provider outlining the process and arrangements. The email included finance documents, which you understood to relate to a funding arrangement for the vehicle's purchase, to be repaid through your salary-sacrifice arrangement. Between MM YYYY and MM YYYY, your insurer deducted the required amounts from your salary. To the best of your knowledge, the deductions were accurate, and everything appeared to be in order. On DD MM YYYY, you entered into a lease agreement with a finance company (the finance company) for a new vehicle. The salary packaging provider coordinated with the finance company to structure the novated lease as part of your salary packaging arrangement. On DD MM YYYY, you, the finance company, and your employer entered into a Novated Lease Agreement (the Lease Agreement). On DD MM YYYY, you took delivery of the leased vehicle. Accident On DD MM YYYY, the leased vehicle was involved in an accident on a motorway while being used for personal purposes, resulting in the vehicle being written off. The other driver was later charged with negligent driving. The leased vehicle had only been available to you for less than xx weeks before the accident and was intended for work-related use over the lease term, including travel between locations, asset transport, external stakeholder meetings, and emergency after-hours response. On DD MM YYYY, you emailed the salary packaging provider to report the accident and request details of the comprehensive insurance they had advised would be arranged for the vehicle. Later that day, you spoke directly with the provider's CEO to follow up on the insurance information. During that conversation, the CEO acknowledged an internal error and confirmed that the vehicle had not been insured as previously indicated. In late YYYY, your solicitors engaged in extensive correspondence with the finance company's legal representatives. They asserted that the finance company had acted as the salary packaging provider's agent and argued that it knew, or ought to have known, the provider had failed to obtain comprehensive insurance for the vehicle. On DD MM YYYY, the finance company issued a letter to you advising that the Lease Agreement had been terminated. On DD MM YYYY, the finance company filed a statement of claim in the District Court in State A, alleging that you had made no repayments under the Lease Agreement. Legal Expenses You have paid the following legal expenses: • On DD MM YYYY - $XX • On DD MM YYYY - $XX • On DD MM YYYY - $XX • On DD MM YYYY - $XX • On DD MM YYYY - $XX You have stated that the legal expenses you incurred were directly related to proceedings arising from your novated lease arrangement, which you describe as part of your employment remuneration package. You advised that the lease was structured through salary packaging, thereby linking it to your assessable income. You further claimed that the finance company failed to insure the vehicle despite receiving the insurance premium, which resulted in litigation against you. According to your account, you initiated legal action to protect your financial position and preserve your salary-packaged benefits. You have indicated that these expenses were incurred to safeguard your assessable income and maintain the integrity of your employment benefits. You advise that the legal matter is still ongoing with no decision made yet. You advise that you are not seeking reimbursement for the legal expenses you have incurred as part of the settlement.

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

Reasons for decision: Detailed Reasoning - Legal Expenses: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent that they are incurred in gaining or producing assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income (the positive limbs). However, subsection 8-1(2) of the ITAA 1997 denies a deduction where the outgoings are of a capital nature, a private or domestic nature, or relate to the earning of exempt income (the negative limbs). Legal expenses may qualify for deductibility under section 8-1 where there is a direct nexus between the expense incurred and the derivation of assessable income. In determining whether a deduction for legal expenses is allowed under section 8-1 of the ITAA 1997, the nature or character 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 private nature, then the expenses incurred in gaining the advantage will also be of a private nature. Courts have held that legal expenses may be deductible if they arise from the day-to-day activities of the taxpayer's business or employment, and if the litigation has more than an incidental connection to income-producing activities. In FC of T v. Rowe (1995) 60 FCR 99; (1995) 31 ATR 392; 95 ATC 4691, the court accepted that legal expenses incurred in defending the manner in which a taxpayer performed their employment duties were allowable. No significance was placed by the court on the taxpayer's status as an employee. However, legal expenses are not deductible where they relate to protecting a taxpayer's personal reputation or where the dispute is of a private nature ( Case U102 87 ATC 621; AAT Case 72 (1987) 18 ATR 3515). | Detailed Reasoning - Application to Your Case: In your case, the legal expenses were incurred in connection with a dispute arising from a novated lease arrangement for a motor vehicle. The lease was facilitated through a salary packaging arrangement made available by your employer via a salary packaging provider, and the vehicle was financed through a finance company. While the novated lease was structured as part of your employment remuneration package, the legal dispute arose following a motor vehicle accident during personal use and concerned the absence of comprehensive insurance and subsequent termination of the lease agreement. The legal action initiated by the finance company related to alleged default under the lease, and your response involved raising concerns about the conduct of the salary packaging provider and the finance company in failing to ensure the vehicle was insured. Although the vehicle was intended for work-related use over the lease term, the accident occurred during personal use, and the legal proceedings did not arise from the performance of employment duties or from activities directly connected to the derivation of assessable income. The salary packaging provider coordinated with the finance company to structure the novated lease as part of your salary packaging arrangement, but this mechanism does not, on its own, convert a private liability into a deductible expense. The dispute concerns personal financial exposure under a consumer lease, and the legal expenses incurred in addressing that claim are properly characterised as private in nature. | Detailed Reasoning - Conclusion: In your case, the legal expenses incurred in responding to the claim brought by the finance company in relation to the novated lease arrangement are not deductible under section 8-1 of the ITAA 1997. Although the lease was structured through a salary packaging arrangement linked to your employment, the dispute arose from the private use of the vehicle and the financial consequences of that use, including default under the lease and lack of insurance coverage. The expenses do not have a sufficient connection to the derivation of assessable income and are therefore private and domestic in nature.