Private ruling: Deductions – expenses - legal fees
Date of advice: 13 February 2019
Published: May 2019
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Are the legal fees you incurred deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. You incurred legal fees as a result of litigation being brought against you by your former employer, Company A, in relation to alleged breaches in relation to your professional conduct. The principal reason you incurred the legal fees was to defend you actions while you were carrying out your employment duties with Company A through which you had gained your assessable income. Therefore, as the connection between the legal fees you incurred and the assessable income you derived in relation to your former employment is evident, you are entitled to a deduction for the legal fees you have incurred under section 8-1 of the ITAA 1997.

Relevant facts and circumstances: You commenced employment with Company A in 20XX. Your sibling (Person A) held a high level position with and was a shareholder of Company A who ceased their employment with Company A in 20XX and was then involved with another business. A number of months after Person A had left their employment with Company A you were advised by a representative of Company A that your services were no longer required by Company A and your employment with them ceased after a short period of time. Company A alleged that Person A’s business was in competition with them and they commenced legal action against Person A and other related parties via a statement of claim on shortly after you had ceased employment with Company A. You were not included in the statement of claim. You were advised that you may be involved in the statement of claim against Person A and others, and sought legal advice from a law firm a number of months after your employment had ended about how to protect yourself in relation to the potential statement of claim. You also sought advice about your concerns that you should remove yourself as the trustee of a trust and incorporate a corporate trustee for the trust due to the potential legal action. You incurred legal fees in relation to the legal advice. In 20XX Company A filed an amended statement of claim in which you were named as one of the defendants and provided a detailed list in relations to their claim against you. You were issued a number of tax invoices from the legal firms whose services you engaged in relation to the legal action. In 20XX a Deed of Settlement (the Deed) between Company A (the Plaintiff) and you and the other defendants, including Person A (collectively referred to as the Defendants) was entered into under which: ● Company A and the Defendants had agreed to settle the Proceeding on the terms of the Deed without admission of liability to avoid further cost and inconvenience; ● Person A would pay a specified amount to Company A within a specified period; ● subject to the payment by Person A, Company A released and discharged the Defendants, being the Released Parties, from any claims and each of the Released Parties released and discharged Company A from any claims; ● by executing the Deed the Defendants made no admission of liability in relation to the subject matter of the Proceeding; and ● each party must pay its own costs and outlays connected with the negotiations, preparation and execution of the Deed.

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