Claiming a legal expense as a tax deduction differs on whether or not you are a business or an individual. When a legal expense is incurred concerning the operation of a business to produce assessable income, it is generally allowable as a deduction. Legal expenses can only be deductible for individuals if they are incurred in deriving accessible income.
The following legal expenses are not deductible under the general deductibility provisions because they are of a capital or private nature. Instead, they are made deductible under a specific provision in tax law:
- the preparation of an income tax return, the disputing of a tax assessment and the obtaining of professional tax advice
- the preparation of lease documents
- certain borrowing expenses, and
- certain mortgage discharge expenses.
Other common legal expenses include
- Business Lease Expenses – The cost of preparing, registering and stamping a lease is deductible if the taxpayer is using or will use the property for earning assessable income.
- Valuation expenses – If the valuation is used to support an application to borrow money for use in the business, those expenses can be claimed as borrowing costs immediately if under $100 or over the life of the loan or five years from the date of the loan, whichever is shorter.
- Fines & Breaches Of The Law – While fines and penalties imposed as a consequence of a breach of any Australian or foreign law are not deductible, the costs incurred in defending an action may be deductible.
Circumstances, where legal fees are usually deductible for businesses, can include:
- negotiating current employment contracts (including disputes) in respect of existing employment arrangements
- defending a wrongful dismissal action bought by former employees or directors
- defending a defamation action bought against a company board
- arbitration in settling disputes (depending on the facts)
- recovering misappropriated funds of the business
- opposing neighbourhood developments that are likely to affect the taxpayer’s business adversely (depending on the facts of the case)
- evicting a rent-defaulting tenant
- recovering wages of an employee as a result of a dishonoured cheque
- defending a libel action provided the case was directly related to comments in pursuit of the company’s business
- pursuing claims for workers compensation, and
- defending the unauthorised use of trademarks (depending on the facts of the case).
Legal expenses can be a complicated deduction to try to claim. By consulting with a professional adviser for your tax questions, you can get the help you need for the best way to proceed.
