Are Legal Fees Tax-Deductible? Learn Which Lawyer Fees You Can Deduct

Anitra Issa

If your business has to pay legal fees, you might be wondering if you can deduct them from your taxable income. In the last year, 1.8 million taxpayers claimed deductions on legal expenses – so the short answer is yes. However, the Australian Taxation Office (ATO) has specific guidelines on which legal fees are tax-deductible and in what situations. In this blog post, we’ll explore the rules for individuals and businesses. We’ll also provide practical advice on how to properly claim tax deductions for your legal bills.

Please note that this is general advice only. If you need specific advice on your own situation, it’s always best to talk to a tax professional. Get in touch at 1300 728 875 or fill out a contact form to get started.

Overview of Tax-Deductible Legal Expenses

The ATO allows deductions for legal expenses incurred while earning assessable income. This includes:

Salary
Business profits
Interest
Rental income

Generally, tax-deductible legal fees are those directly related to:

Income production
Business operations
Defending claims that could affect your taxable income

Personal legal costs are not tax-deductible and must be kept separate from business-related expenses. While approximately 42% of legal fees are eligible for tax deductions, knowing which ones apply to you and your business can significantly impact your tax return. By correctly identifying and claiming eligible legal expenses, you can reduce your taxable income and potentially increase your refund. Just as important is making sure you are complying with tax laws to avoid legal issues with the authorities.

Types of Legal Fees and Their Tax-Deductibility

Understanding which legal fees are tax-deductible can save you money and prevent mistakes when filing your tax return. The ATO differentiates between various types of legal expenses, allowing deductions for some while not allowing others.

Business-Related Lawyer Fees

Lawyer fees incurred for business purposes are generally tax-deductible, as they are considered necessary expenses to maintain, operate, or expand a business. Common examples include costs incurred for:

Drafting contracts
Collecting debts
Defending lawsuits related to income production
Protecting intellectual property

There are also certain legal costs that are deductible under special provisions. For instance:

Legal bills for preparing, registering, or stamping a lease are deductible, as long as the property is specifically used to generate income.
Valuation expenses related to borrowing money for business purposes are also deductible. If the expense is under $100, it can be claimed immediately. Larger amounts can be typically spread over five years or the life of the loan.
Legal expenses incurred while defending actions related to fines and penalties may be deductible, though the fines themselves are not.

Some legal fees incurred through business are not tax-deductible, such as:

Costs associated with negotiating new employment contracts, which are considered personal (if you are the employee). Businesses, however, can deduct these.
Defending driving charges, even if the charges occurred while conducting business.
Expenses incurred when evicting tenants after their lease expires.
Lawyer fees related to redundancy payouts or compensation disputes (for employees - businesses, however, can deduct these).

Legal Bills for Self-Employed Individuals

Self-employed individuals can also deduct many legal expenses as part of their operational costs incurred, particularly those tied directly to income production. For example:

Lawyer fees for resolving client disputes
Drafting business agreements
Negotiating contracts

Personal and Individual Lawyer Fees

Personal legal fees, such as those related to divorce proceedings, drafting wills, or personal injury claims, are not tax-deductible in Australia. For individual taxpayers, legal fees can only be considered deductible if they are directly linked to generating income. This generally includes:

Defending employment claims (depending on whether it is considered on capital or income account)
Managing disputes over rental properties (note, this is only in relation to properties where the individual taxpayer is receiving rent, not paying it)
Acquiring or protecting income streams such as from investments or intellectual property

Some legal expenses, although typically not deductible due to being capital or private in nature, can be deducted under specific tax provisions, such as:

Preparing an income tax return, disputing tax assessments, or obtaining professional tax advice
Preparing lease documents
Certain borrowing expenses and mortgage discharge fees

Special Circumstances Where You May Be Able to Claim Tax Deductions on Legal Expenses (if You Are a Lawyer)

For lawyers and other professionals, expenses related to continuing education or skill development may be tax-deductible if they enhance your ability to earn income in your current profession.
If your legal matters involve travel, accommodation, and ground transportation, these may be deductible if directly related to the legal issue at hand.
If you use a portion of your home exclusively for legal work, you may be able to claim a deduction for this space. This can include a percentage of rent, utilities, and maintenance costs.
Costs for computers, software, and other equipment used primarily for legal work may be deductible. If the item is used for both personal and professional purposes, you may need to calculate which percentage is for business and only claim that amount.
Expenses for legal research materials, including books, online databases, and journals, may be tax-deductible if they're necessary for your work.

The rules can be complex and confusing so if you’re ever in doubt, make sure to consult with a tax professional. It is always best to make sure you're claiming deductions correctly and in compliance with current tax laws.

At Darcy Bookkeeping & Business Services, we have a highly experienced team of tax specialists who can help you with your taxation needs. Drop us a line or call 1300 728 875 to get started.

Practical Tips on Claiming Deduction on Legal Bills

Keep detailed invoices from your legal representative and retain all receipts.
Maintain a clear record of all dates, amounts, and the nature of the legal services provided
Document the purpose of legal services and how they directly relate to your income-producing activities

Reporting Lawyer Fees on Tax Returns

Reporting legal fees on your tax return involves careful documentation. You must classify the expenses correctly, distinguishing between deductible legal fees and non-deductible personal legal costs incurred.

Business owners or self-employed individuals typically report legal fees as part of their operational expenses.

Individual taxpayers must attach their legal fee claims under specific income-related expense categories.

Hiring a Tax Professional for Guidance

While it may seem like it would be cheaper and easier to work out legal fee deductions on your own, people who use professional tax services are 37% more likely to successfully claim tax deductions for legal expenses.

A qualified accountant or tax consultant can help you by:

Assessing your specific legal expenses and determining which are tax-deductible
Guiding you on how to properly report legal fees on your tax return
Helping you correctly categorise legal fees as business, personal, or capital expenses
Addressing capital gains tax implications
Suggesting strategies to optimise your tax deductions while ensuring compliance with tax laws in your area
Keeping you updated on any changes to tax laws

Common Tax-Deduction Mistakes to Avoid

One of the most common errors in trying to deduct tax on legal fees is people attempting to claim personal legal expenses as business deductions. If you attempt this or even do it mistakenly and your tax return is audited, you could receive penalties or fines.

Another mistake is when deductions are not directly related to income production but are in fact capital expenses.

Failing to keep accurate documentation and proof often leads to claims being denied.

Legal fees being claimed not within the year they were incurred. If the legal process spans multiple tax years, they must be organised correctly and claimed in the correct periods.

How Can Darcy Bookkeeping & Business Services Help with Tax Deductions?

Figuring out all your tax deductions can be so time-consuming but failing to claim eligible deductions can significantly impact your business's bottom line. By working with Darcy Bookkeeping & Business Services, you can ensure you're taking advantage of available tax deductions while staying compliant with tax laws. If you need assistance managing your legal expenses, send us a message or give us a call on 1300 728 875 to find out how we can help keep your legal bills organised and maximise your tax return.