Legal Costs - Tax Deductions

By Raeesa Ebrahim Atkinson 

Category: Dispute Resolution and Commercial Law

Relationships are created on a daily when running a business. Sometimes, these relationships can be complex and navigating the termination or management of these relationships may require the procurement of legal services. 

Legal services need to be paid for and can be costly. Can a business claim for legal costs from their tax deductions? 

What Are Legal Costs? 

Legal costs, or legal expenses in more generic terms, refer to the expenses a business may incur during a legal matter and the payments that the business would have to make to an attorney or advocate for their services during the conduct of such a matter. 

Considering the above, legal expenses can include anything from the costs of sending an email to the costs associated with an advocate appearing at court. 

Tax Principles Applied To Legal Costs 

Section 11 (c) of the Income Tax Act 58 of 1962 (the “Act”), as amended states the following regarding legal costs:  

"For the purpose of determining the taxable income derived by any person from carrying on any trade within the Republic, there shall be allowed as deductions from the income of such person so derived - …any expenditure, other than that of a capital nature, actually incurred by the tax payer during the year of assessment in respect of any dispute or action at law arising in the course or by reason of the ordinary operations undertaken by him in the carrying out of his trade;…" 

According to the South African Institute for Taxation ("SAIT"), for a business to successfully claim for legal expenses as part of its deductions the expense must be in relation to a claim, dispute or action at law, the expense must not be of capital nature and it must have been incurred in the ordinary operation of the business.1 In saying that, however, it is essential to note that legal expenses concerning a claim for damages do not fall under the above section's ambit.  

The Act does not define a “claim, dispute or action at law”, however a broad interpretation of the phrase for the purposes of the section appears to include both litigious and non-litigious claims and/or disagreements which result in legal proceedings.2  

Clear definition is further not given to “ordinary operation of the business”. If it can be shown that the expense incurred for the aforesaid claim, dispute or action at law is related closely enough to the business’ trade, this requirement should be satisfied. 

Conclusion 

In conclusion, the determination of whether a business’ legal costs is tax deductible may in itself require the assistance of a legal professional. It is important to have a business’ position on legal expenses clearly defined before submitting to the revenue services. In saying that, certain legal expenses may still fall within the general deduction allowances under other provisions of the Act. 

Contact an attorney at SchoemanLaw inc for your legal needs by visiting our website at www.schoemanlaw.co.za.  

Raeesa Ebrahim Atkinson 

Specialist Attorney Civil Dispute Resolution and Commercial Law

SchoemanLaw Inc | www.schoemanlaw.co.za