I have a client who has to pay a legal settlement claim. All the legal expenses from the attorney has in the past been deducted for income tax and the vat input claimed accordingly. Now with the settlement payment of over R1mil, will this be tax deductibl
Important:
This answer is based on tax law for the year ending 28 February 2017.
Answer:
It is not the fact that the amount in issue is more than R1 million that is relevant. Also not that expenses were allowed in the past. From the facts provided it appears that the legal expenses may have been “actually incurred by the taxpayer during the year of assessment in respect of any claim, dispute or action at law”. The deduction can then only be made under section 11(c) of the Income Tax Act.
Because you mention compensation, proviso (iii) of section 11(c) may also apply - -i.e. the legal expenses may be “incurred in respect of any claim made by the taxpayer for the payment to him (or her) of any amount which does not or would not constitute income of the taxpayer…” No deduction will then be possible.