Edited version of your private ruling

Authorisation Number: 1011958091972

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Ruling

Subject: legal expenses

Question 1

Are you entitled to a deduction for $XXX in legal expenses incurred to defend defamation action?

Answer

Yes.

Question 2

Are you entitled to a deduction for legal expenses that may be incurred during the year ended 30 June 2012?

Answer

The Commissioner declines to rule.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You have published a book.

The story included details about the author's relationship breakdown.

Some references to the author's former partner were considered harsh and many were removed from the book.

After the book was launched, you were served with defamation papers by the author's former partner.

Your lawyers and barrister advised that nothing you had published was actually defamatory and that you should fight the action.

You immediately withdrew the book from sale and the case is currently pending a trial.

To date $XXX in legal fees has been incurred, but you contend there are substantially more legal fees to be paid.

You had agreed to store the books for the author as a favour as they had a health condition and was in the process of moving.

You also agreed to sell the books on your website and to bookstores.

You received XX% of the wholesale price.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1 and

Taxation Administration Act 1953 Paragraph 357-110(1)(a).

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (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.

Legal expenses are generally deductible if they arise out of the day to day activities of the taxpayer's business (Herald and Weekly Times Ltd v. Federal Commissioner of Taxation (1932) 48 CLR 113). For legal expenses to constitute an allowable deduction, it must be shown that they were incidental or relevant to the production of the taxpayer's assessable income, (Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47).

In each case the nature of the alleged misconduct, the scope of a taxpayer's income earning activities and other existing circumstances, will determine whether the legal expenses are a deductible expense. Only legal expenses relating to the defence of actions performed in the natural course of a taxpayer's business activities are allowable deductions.

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.

In your case, the legal expenses incurred in defending defamation action taken against you in relation to a book you published are sufficiently connected with your income earning activities. They arose in the course of your duties from which you derive assessable income. Therefore, the legal expenses incurred are deductible under section 8-1 of the ITAA 1997.

Question 2

Detailed reasoning

Under certain circumstances the Commissioner may decline to make a private ruling. We are declining to give you a private ruling for the following reason.

Paragraph 357-110(1)(a) of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) states the Commissioner may decline to make a ruling if he considers that the correctness of a private ruling would depend on which assumptions were made about a future event or other matter.

The Commissioner considers the correctness of your private ruling on the deductibility of legal expenses under section 8-1 of the ITAA 1997 would depend on a number of assumptions about future events.

Some of these assumptions are:

· how much legal expenditure will in fact be incurred in the future

· what the purpose of the expenditure will be

· who the expenditure will by incurred by

· what the outcome of the pending trial will be and what, if any, impact or consequence it may have on your circumstances

We are not prepared to make a ruling on the basis of these assumptions.