Are Legal Fees Deductible for Tax? A Guide for Australian Businesses

Many businesses will find themselves paying legal fees at some point, whether it’s for navigating contracts, settling disputes, or setting up a new entity. This leaves them wondering whether these legal fees are tax deductible when the time comes to file their annual return. 

This guide will help you understand what legal fees are in the context of Australian businesses, why it’s important for businesses to understand which fees are deductible for tax purposes, and how you can go about claiming them when the time comes.

What types of legal expenses are tax deductible?

There are many categories of legal fees in businesses, and not all of them are tax-deductible. 

The ATO provides specific guidelines on which legal fees are deductible for tax purposes, but the general rule is that you can only claim legal costs that are directly related to running and maintaining your business. 

Here are some of the most common types of legal expenses, and whether they are tax-deductible or not:

The importance of proper documentation

While you can’t always predict having to spend on legal fees, you should always ensure you’re keeping proper records and receipts, so that you’re well equipped to provide evidence should you ever claim legal fee deductions for taxes. If you don’t have the necessary information, your deduction could be denied—and you could even face penalties during an audit.

When making your claim, the ATO may request evidence that the legal costs in question are related to business activities, so accurate record-keeping is vital. To make sure all your claims are compliant, ensure you keep records of the following:

• Itemised invoices from your legal provider
• A note of the purpose of the legal service (e.g. contract negotiation or debt recovery)
• Any related correspondence or agreements
• Digital and hard copies in a secure location, for at least five years

How to claim legal fees as tax deductions

To claim legal fee deductions for taxes, you’ll need to report them when lodging your tax return as part of your business deductions. To do this, you’ll need:

• A clear breakdown of all legal fees
• Proof of payment, such as bank records or receipts
• Documentation showing the business-specific purpose of the fees

If you lodge your own tax returns, you can use the myTax or the Business and professional items schedule to report any legal expenses in the 'business expense' section.

If you want to make sure you’re reporting all claims correctly, and not overlooking any potential deductions on offer, you can use a registered tax agent to file your return on your behalf. The QuickBooks ProAdvisor programme will help you find an accountant near you who can help you stay compliant and maximise your return.

Common misconceptions to avoid when claiming legal expenses

It’s important to file your report accurately if you want to claim legal fee deductions for taxes. If you don’t, your claim may be denied or you may even be subject to penalties. There are a few common mistakes businesses make when claiming legal fees, so make sure you avoid doing the following to avoid any issues:

• Mixing business and personal costs: Only legal fees directly related to your business operations are deductible, so don’t include any relating to personal matters in your return.
• Assuming all legal fees are deductible: Some legal fees need to be claimed over time, and others can’t be claimed at all.
• Failing to keep proper records: Poor documentation or not keeping detailed records makes it difficult to justify claims if you’re audited
• Claiming before the service is completed: You can only claim legal fee deductions for taxes in the financial year they are incurred, and when the work is fully completed.

Maximise your tax deductions with QuickBooks

If you’ve ever sought legal advice or paid for legal services, understanding which fees are tax-deductible can save you and your business a significant amount of money. However, you must track and manage your finances accurately at all times to ensure you have the evidence you need to claim these deductions in your tax return. 

QuickBooks accounting software for small businesses helps you keep accurate financial records, tracking legal expenses as they happen, keeping digital records for easy access and connecting you to expert accountants to streamline the tax return process.