A business expense is defined as any expense incurred in the running of your business. These include both day-to-day expenses like salaries and any one-off costs such as any repairs or business travel. So long as it is related to your business, you can file it under business expenses in your company’s financial records. The purpose of keeping a record of all these expenses is so you can have them deducted when you file your company’s tax returns
Under section 8-1 of the Income Tax Assessment Act 1997, your business can list business expenses as General Tax deductions when filing taxes. This process is straightforward if you, for example, are claiming expenses for tools if you’re a Tradie or the petrol costs to travel and meet a client. However, when it comes to classifying legal fees as a business expense, not all legal costs a business incurs can be listed as a business expense.
Legal fees that can be listed as business expenses
Under general tax deductions, any legal fees you incur in running the business with the purpose of producing assessable income can be deducted. Also, if you, for example, commence legal proceedings with the purpose of producing an assessable income, those expenditures will be fall under business expense.
Common examples include:
- Salaries and wages
- Recovering funds, loans or wages
- Defending an unfair dismissal claim
- Defending employee misconduct claims
- Lease payments for the place of business
- Proceedings against tenants who have not paid rent
- Defending any breaches to your trademark or patent
- Negotiation costs for existing employee’s employment contract
- Management fees for sportsmen in gaining non-playing incomes
- Damages relating to breach of contract, particularly employment disputes
Legal fees that cannot be listed as business expenses
The exceptions to claiming legal fees as business expenses are where legal fees are capital, domestic or private in nature. The general idea is that they don’t help in running the business with the purpose of gaining assessable income and therefore do not count as business expenses.
Common examples include:
- Defending private claims
- Valuation fees for a business
- Private fees such as clothing expenses
- Preparing lease documents for a property
- Defending sexual harassment or racial discrimination/ vilification charges
- Fines and penalties, even if you run a red light on your way to meet a client
- Legal expense related to capital expenses, like buying or selling a building for example
Specific Deductions
Your business can deduct specific expenses from its income tax. The Income Tax Assessment Act specifies these provisions. They relate to legal expenses such as:
- Preparing income tax documents or disputing tax assessments
- The preparation, registration, and stamping of any lease document for a property intended to use as the place of business such that it produces an assessable income
The examples provided in this article are not exhaustive. For personalized advice for your business, please speak with a tax lawyer.
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