Legal expenses can represent a significant cost for Australian individuals and businesses, but many are tax deductible when they are incurred in earning assessable income or running a business. The ATO's rules on deductible legal costs changed significantly with the 2023 Full Federal Court decisions, and knowing which legal fees you can claim in 2026 can save thousands of dollars at tax time.
When Are Legal Expenses Tax Deductible for Businesses?
Under Section 8-1 of the Income Tax Assessment Act 1997, legal expenses are deductible if they are incurred in carrying on a business for the purpose of producing assessable income. Business legal costs that are generally deductible in 2026 include:
- Legal fees for debt collection and recovering trade debts
- Costs of defending workplace health and safety prosecutions (where you were not found guilty)
- Legal fees related to employment contracts, termination disputes, and redundancy
- Lease negotiation and commercial property legal costs
- Costs of opposing third-party objections to business permits or licences
- Legal fees for tax audits and ATO disputes (where related to the business)
- Franchise agreement legal costs (may need to be amortised)
When Are Legal Expenses NOT Tax Deductible?
Legal expenses that relate to capital transactions, private matters, or penalties are not deductible:
- Legal costs of purchasing or selling a business (these form part of the CGT cost base)
- Costs of setting up a business structure (company registration, shareholders agreements)
- Legal fees for divorces and personal family law matters
- Costs of defending criminal charges or regulatory penalties
- Costs of disputing a tax penalty (as opposed to the underlying tax)
Legal Expenses Tax Deductions for Individuals
Individuals can deduct legal expenses that are directly connected to earning their assessable income:
- Deductible: Legal costs of disputing termination or unfair dismissal to obtain salary or wages; costs of preparing employment contracts
- Deductible: Legal fees incurred in suing an employer for salary, wages, or entitlements owed
- Not deductible: Legal costs of negotiating a property settlement in a family law matter
- Not deductible: Personal legal matters unrelated to income-producing activity
ATO Audit Defence Legal Costs
Legal fees incurred defending an ATO audit are deductible to the extent they relate to the income-earning activities being audited. If the ATO disputes a business deduction claim and you engage a tax agent or lawyer to contest it, those professional fees are generally deductible. However, costs of disputing ATO penalties (as opposed to the underlying tax liability) are not deductible.
Frequently Asked Questions
Can I claim legal fees on my tax return?
Yes, if the legal fees were incurred in earning your assessable income or running your business. Personal legal costs (divorce, personal disputes, buying a private home) are not deductible. Always obtain a detailed tax invoice describing the nature of the legal work performed.
Are legal costs capital or revenue in nature?
Legal costs of acquiring or disposing of a capital asset (property, business, shares) are capital in nature and form part of the CGT cost base — not an immediate deduction. Legal costs of the ongoing operations of a business are revenue expenses and are immediately deductible.
Can I claim GST on legal expenses?
Yes. If you are registered for GST and the legal services were supplied in the course of your enterprise, you can claim an input tax credit for the GST component on the legal firm's tax invoice. This applies regardless of whether the underlying legal cost is income-tax-deductible.
Not sure whether your legal costs are deductible? Contact AWTS for a review of your business expenses and deductions.
