Edited version of private advice

Authorisation Number: 1052131221197

Date of advice: 6 July 2023

Ruling

Subject: Deductions - legal expenses - defamation

Question

Are the legal costs for having defamation articles removed deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period

Year Ending 30 June 2023.

The scheme commenced on:

1 July 2022.

Relevant facts and circumstances

While employed with a previous employer a media outlet started writing defamatory articles about you.

You engaged a law firm to have those articles removed.

The requests were initially ignored.

You had the law firm lodge a 'concerns' notice regarding the defamatory articles.

The media outlet agreed to remove all but two articles which were edited to remove imputations.

You left your previous employer and started a consulting business.

Approximately one year later the media outlet wrote another defamatory article.

You again engaged a law firm to have those articles removed. A second concerns notice was lodged raising the same imputations conveyed from the previous articles written.

The media outlet agreed to remove the article.

You left your consulting business and started with your current employment.

The media outlet published a further two articles in relation to you consulting work with your now current employer.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Question

Are the legal costs for having defamation articles removed deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

Your legal expenses incurred in taking defamation action are not deductible under section 8-1 of the ITAA 1997 as they are considered to be insufficiently connected with your income earning activities and are private or capital in nature.

Detailed reasoning

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

In determining whether a deduction for legal expenses is allowed under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered (Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; [1946] HCA 34; (1946) 3 AITR 436; (1946) 8 ATD 190). The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses. If the advantage to be gained is of a capital nature, then the expenses incurred in gaining the advantage will also be of a capital nature.

The courts, on a number of occasions, have determined legal expenses to be an allowable deduction if the expenses arise out of the day to day activities of the taxpayer's business. The action out of which the legal expense arises has to have more than a peripheral connection to the taxpayer's business or income earning activities. The expense may arise out of litigation concerning the taxpayer's professional conduct.

In FC of T v. Rowe (1995) 60 FCR 99; (1995) 31 ATR 392; 95 ATC 4691, the court accepted that legal expenses incurred in defending the manner in which a taxpayer performed his employment duties were allowable. No significance was placed by the court on the taxpayer's status as an employee.

However, there must be an evident connection between the expenditure in instituting the proceedings and the taxpayer's earning activities. Legal expenses are also capital or private in nature where the legal action taken is to protect the taxpayer's personal good name and reputation (Case U102 87 ATC 621; AAT Case 72 (1987) 18 ATR 3515).

Your legal expenses were not sufficiently connected with your income earning activities and are essentially private or capital in nature and character. The need for them arose out of your reaction to what you saw as damage to your credit and reputation.

Your legal expenses incurred in taking defamation action are therefore not deductible under section 8-1 of the ITAA 1997 as they are considered to be insufficiently connected with your income earning activities and are private or capital in nature.

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