Private ruling: Deduction - legal expenses
Date of advice: 18 September 2025
Published: 17 November 2025
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Can you claim a deduction for the legal expenses under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to the extent that they relate to your employment? | A1: Yes. | Q2: Can you claim a deduction for the legal expenses under section 8-1 of the ITAA 1997 to the extent that they relate to your senior role duties? | A2: Yes. | Q3: Can you claim a deduction for the legal expenses under section 8-1 of the ITAA 1997 to the extent that they relate to your professional licence? | A3: No.

Relevant facts and circumstances: You have held a registered professional licence for some years that enables you to work in profession. You received a letter to confirm your employment with Company X, with the Terms of employment with Company X being provided with contained the following information: • Terms of employment with Company X - That Company X may require you to hold a senior role at Company A or of a Group Company without any additional remuneration and the benefits under the agreement are in part consideration of you agreeing to undertake the senior role. - Notice period - either party may terminate the employment by giving a specified period of notice. • On termination of your employment, you must resign all senior roles held as a consequence of the employment and you irrevocably appoint the Company Secretary of Company X as your agent to execute any relevant documents on your behalf. Some months later you were appointed as one of several senior position holders of Company X, being a condition of your employment. This appointment was essential for the Company X's business and your ongoing income to satisfy the relevant State Authority's licensing rules, which mandated that one of the senior position holders held a specified licence to comply with Company X's Australia Securities and Investment Commission's obligations. You did not receive any fees in relation to your senior role during your employment but had received salary and wages which had been increased in relation to you becoming a senior role holder. It was essential that you held your professional licence for both your senior role with Company X and your ongoing employment. You were not able to obtain financial information of Company X's that you felt was necessary to complete your duties in your senior role. You were considering resigning your senior position with Company X and withdrawing the use of your professional licence. You wanted to fully understand any impacts there would be for you if you resigned from your senior role in relation to your professional licence and your employment. Additionally, you were seeking to avoid/minimise the likelihood of you being sued due to being a senior position holder with Company X. You engaged the services of a legal firm (Lawyer) to provide legal advice in relation to the following issues: • Your employment rights and obligations to ensure that your legal rights as an employee were not unfairly impacted by your resignation and/or any other decisions you made as a senior position holder. • Your responsibilities as a registered professional under the relevant state legislation to ensure that you maintained your professional licence and ability to earn future income someone registered in your profession; and • Your obligations and rights as a senior position holder arising directly from your employment, to ensure your legal compliance with your duties as a senior position holder. The Lawyers: • Reviewed documents, such as your employment contract, state legislation and regulations, Company X's senior position holders' insurance policy, and the events that had occurred since you had taken on the senior position with Company X; and • Provided independent legal advice via email and verbally in relation to options available to you prior to you resigning, following verbal threats from the other senior position holders at Company X and following your resignation as a senior position holder. They also provided advice in relation to your employment rights; and in response to the Administrators appointed in relation to the administration of Company X. You expected to receive the following from the Lawyers: • Professional advice to ensure that you acted in accordance with the law so that you could maintain your professional licence and your ability to earn future income as a registered professional. • Provide advice in relation to your employment rights and protecting your entitlements as an employee. • Independent advice in relation to whether decisions made by the other senior position holders so that you could determine whether your resignation was appropriate; and • Advice to ensure your compliance with your legal duties as a former senior position holder responding the requests from the Administrator following your resignation as a senior position holder. You resigned as a senior position holder of Company X and removed your professional licence from being listed as the Company X's professional licence. The Lawyers issued several tax invoices in relation to your engagement of their services in relation to the issues being considered in this ruling. You tried to have the legal expenses reimbursed by Company X when they were incurred, but your claim was rejected, with the Company X entering into Voluntary Administration and your employment being terminated shortly after. Company X is subject to a Deed of Company Arrangement, and you do not have any dealings with Company X or their insurance policies. You did not, and will not, make any insurance claim in relation to the legal expenses. You personally paid the legal expenses. You estimate that the legal expenses totalling should be apportioned into the following components: • your senior position holder duties • your professional licence; and • your employment contract.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 108-5

Reasons for decision: Detailed Reasoning - Deductions - 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 to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature. In determining whether a deduction for legal expenses is allowed under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered ( Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; [1946] HCA 34; (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 capital nature, then the expenses incurred in gaining the advantage will also be of a capital nature. The courts, on a number of occasions, have determined legal expenses to be an allowable deduction if the expenses arise out of the day-to-day income producing activities of the taxpayer ( The Herald and Weekly Times Ltd v. FC of T (1932) 48 CLR 113). The action out of which the legal expense arises has to have more than a peripheral connection to the taxpayer's business or income earning activities. There must be an evident connection between the incurring of the legal expenses and the taxpayer's earning activities. You have apportioned your legal expenses into the following components, and we have considered whether you are entitled to any deduction in relation to any of them as follows: | Detailed Reasoning - Legal expenses incurred in relation to employment/employment contract: A deduction for legal expenses by an employee depends on the particular facts of a case. For legal expenses to constitute an allowable deduction, it must be shown that they were incidental or relevant to the production of the taxpayer's assessable income, ( Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; [1949] HCA 15; (1949) 4 AITR 236; (1949) 8 ATD 431). When the principal reason for incurring the legal expenses is defending the actions of the taxpayer in carrying out their employment duties through which they gain or produce assessable income, such expenses are characterised as being of a revenue nature and are deductible (Inglis v. FC of T 87 ATC 2037; and Case V116 88 ATC 737; AAT Case 4502 (1988) 19 ATR 3703). Taxation Ruling TR 2000/5 Income tax and fringe benefits tax: costs incurred in preparing and administering employment agreements outlines that employees may claim deductions for legal expenses incurred in relation to their employment agreements and safeguarding their rights and entitlements under the employment agreement when the legal expenses are incurred in relation to the earning of their assessable income. Application to your situation You were engaged by Company X as an employee, but also held a senior position with Company X. You engaged the services of the Lawyers to ensure that your rights and obligations as an employee would not be impacted by your resignation and/or any other decisions you made as a senior position holder. It is accepted that legal expenses were incurred in relation to how you had undertaken your employment activities and to safeguard and protect your rights under the employment agreement with Company X in relation to any rights it provided you. Therefore, a deduction can be claimed to the extent that the legal expenses related to this issue as the expense was not a private expense, nor of a capital nature. | Detailed Reasoning - Legal expenses incurred in relation to senior position duties: In Case U134 87 ATC 780; (1987) 18 ATR 3646 involved a taxpayer who was a director of and a shareholder in a family company. The taxpayer did not receive any payments from the company for his services as a director of the company. However, the taxpayer did receive a dividend from the company. In disallowing the claim, the Tribunal held that: ...the outgoings were incurred in his capacity as a director and are consequently not sufficiently related to the carrying on the business of being a shareholder. Additionally, as no allowance was paid to him in his capacity as a director, it cannot be said that the expenses were incurred in gaining or producing assessable income in that capacity. ATO Interpretative Decision ATO ID 2003/801 Income tax deduction: legal expenses incurred by a company director who did not receive any director's fees or share of profits outlines that ifa taxpayer does not derive any assessable income from their position as a director of a company and they incur expenses in respect of their position as a director, they would not be entitled to a deduction under section 8-1 of the ITAA 1997 as the expenses would not have been incurred in gaining or producing assessable income in their capacity as a director. Application to your situation Your engagement with Company X required you to be both an employee and a senior position holder. You received a specified amount due to you being a senior position holder in addition to the salary you earned as an employee of Company X. Your situation can be distinguished from the above court case and ATO ID. Therefore, you are entitled to claim a deduction for legal expenses you incurred to the extent that they relate to your senior position duties. | Detailed Reasoning - Legal expenses incurred in relation to professional licence: As outline above, if the advantage to be gained is of a capital nature, then the expenses incurred in gaining the advantage will also be of a capital nature. Section 108-5 of the ITAA 1997 states that a CGT asset is any legal or equitable right that is not property, which can include intangible assets such as licences that are not statutory licences which includes import or export licences. Application to your situation A registered professional licence is a CGT asset. The amount you paid to acquire your professional licence was a capital expense to enable you to undertake activities related to your profession. It is an enduring asset that is capital in nature and while you needed it to earn your assessable income, it retains its capital nature. Therefore, you cannot claim a deduction for the legal expenses you incurred to the extent that they relate to your professional licence as the advantage you were seeking was capital in nature. | Detailed Reasoning - Conclusion: Based on your apportionment of the legal expenses into the separate components, you: • Can claim a deduction to the extent that legal expenses were incurred in relation to your employment/employment contract. • Can claim a deduction to the extent that the legal expenses were incurred in relation to your senior position duties; and • Cannot claim any deduction to the extent that the legal expenses were incurred in relation to your professional licence.