Tax deductible legal expenses

While we like to think of business ventures as a platform to make money, there are also many expenses that will be incurred through running one.

Luckily, there are many tax deductions a business owner can claim when it comes to the expenses their business incurs, in particular their legal expenses. Understanding what these tax deductible expenses are and how to apply for these deductions appropriately can see you save a considerable amount of money, which can be transformed into profit.

Specific expenses incurred will or won’t be deductible depending on whether the expenditure is capital, domestic or private in nature. The following expenses are not deductible under regular legal expense deductions, due to being either capital or private in nature. Deductions can be claimed under a separate provision. These include:

  • Preparations of income tax return
  • Obtaining professional tax advice
  • Borrowing expenses
  • Mortgage discharge expenses
  • Preparation of leases

The circumstances in which legal fees incurred can be easily deducted for tax purposes, provided the correct procedure is followed and appropriate criteria is met, include the following:

  • Defending wrongful dismissal action, defending defamation action brought against a company board and defending unauthorised use of trademark.
  • Pursuing claims for workers’ compensation.
  • When negotiating current employment contracts with existing employees.
  • Recovering misappropriated business funds.
  • Arbitration when settling disputes.
  • Recovering wages of an employee due to a dishonoured cheque.
  • Evicting a rent-defaulting tenant.
  • Opposing certain neighbourhood developments.

Tax deductions on the above listed legal expenses are a guide, and will be determined on a case by case basis, depending on the specific circumstances relating to each case.

There are also a number of situations in which legal expenses are commonly incurred and are not tax deductible, including the following:

  • When negotiating employment contracts with new employees.
  • Defending charges of various natures, including and not limited to driving charges, sexual harassment charges, racial vilification or discrimination charges.
  • Negotiates concerning redundancy payouts or fees incurred through seeking to increase the amount of any redundancy payout.
  • Evicting tenant/s whose term had expired.

The ATO sets out clear guidelines of the appropriate documentation needed in order to claim deductions from legal expenses. Generally, documentation needed includes:

  • Completed relevant private ruling form or completed relevant objection form.
  • Reasons and circumstances concerning legal expenses incurred.
  • Documentation detailing the circumstances of the legal expenses, such as court documents.
  • Explanation of how the expenses are relevant to gaining or producing of assessable income.
  • Details concerning actions taken to recover costs from the other party.
  • Details of payments made as a result of the legal issue.

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