ATO Interpretative Decision
ATO ID 2001/549
Income TaxLegal Expenses - Defamation Action
FOI status: may be released
Status of this decision: Decision Current
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Are the legal expenses incurred by the taxpayer to prevent defamatory statements being made by a colleague an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Yes, the legal expenses incurred by the taxpayer to prevent defamatory statements being made by a colleague are an allowable deduction under section 8-1 of the ITAA 1997.
The taxpayer is an employee. A colleague disagreed with the taxpayer's work performance and began action to have the taxpayer replaced. The colleague sent the taxpayer abusive e-mails and a letter stating that the taxpayer was not fulfilling the requirements of the position. Copies of the e-mail and the letter were forwarded by the colleague to the taxpayer's manager.
The taxpayer incurred expenses in engaging a solicitor to provide advice. The colleague received a letter from the taxpayer's solicitor warning that his actions were grounds for a defamation action and requesting the actions cease.
Reasons for Decision
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.
Legal expenses are deductible provided the legal action:
- arose out of, or concerns the day to day income producing activities of the taxpayer (The Herald and Weekly Times Ltd v. FC of T (1932) 48 CLR 113)
- is not undertaken to protect the taxpayer's profit-yielding subject
- have more than a peripheral connection to the taxpayer's business (Magna Alloys and Research Pty Ltd v. FC of T (1980) 11 ATR 276; 80 ATC 4542; Putnin v. FC of T (1991) 21 ATR 1245; 91 ATC 4097)
- may arise out of litigation concerning the taxpayer's professional conduct (Magna Alloys and Research Pty Ltd v. FC of T (1980) 11 ATR 276; 80 ATC 4542; Putnin v. FC of T (1991) 21 ATR 1245; 91 ATC 4097)
When the principal reason for incurring the legal expenses is defending the actions of the taxpayer in carrying out their employment duties through which they gain or produce assessable income, such expenses are characterised as being of a revenue nature and are deductible (Inglis v. FC of T 87 ATC 2037; and Case V116 88 ATC 737; AAT Case 4502 (1988) 19 ATR 3703).
The taxpayer is an employee who incurred legal expenses defending actions undertaken in carrying out employment duties through which assessable income is gained. Therefore, the legal expenses are an allowable deduction under section 8-1 of the ITAA 1997.Date of decision: 18 October 2001
Income Tax Assessment Act 1997
The Herald and Weekly Times Ltd v. FC of T
(1932) 48 CLR 113
(1980) 11 ATR 276
80 ATC 4542 Putnin v. FC of T
(1991) 21 ATR 1245
91 ATC 4097 Inglis v. FC of T
87 ATC 2037 Case V116
88 ATC 737 AAT Case 4502
(1988) 19 ATR 3703
Deductions & expenses
Date reviewed: 12 November 2013