Edited version of private advice

Authorisation Number: 1052249114961

Date of advice: 9 May 2024

Ruling

Subject: Deductions - legal expenses

Question

Are the legal expenses you incurred deductible under section 8-1 of the Income Tax Assessment Act 1997?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20YY

Year ended 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

You held Position A in Entity A from DD MM 20YY to DD MM 20YY.

During the years 20YY and 20YY, various false, misleading, defamatory and deceptive allegations were circulated via text messages and in person about you relating to your conduct during an incident that occurred several decades ago.

Just prior to the election of a new Position B of Entity A, which was held on DD MM 20YY, these activities increased.

Further emails and letters were sent to Entity A members and to media as well as text messages dated DD MM 20YY.

Almost all of the emails, letters and text messages were from anonymous sources, at least one fictitious email address and potential double-blind email accounts located in Country B.

On DD MM 20YY the media published a story about the allegations.

In your private ruling application, it is stated that the allegations were specifically aimed at preventing your further advancement within Entity A.

On DD MM 20YY a statement was issued by Person B who was then in Position B of Entity A, stating the allegations made about you were false. The letter was on corporate letterhead of Entity A.

You sought legal advice for assistance to identify the anonymous sources and to attempt to cease the communications. In your private ruling application, it is stated that the allegations were negatively impacting your chance of continuing in your current role and your chance of election to Position B.

The legal team successfully traced a person responsible for providing the materials to Entity A members and the media.

The legal team acted on your behalf to attempt to cease any further actions by the person responsible.

The legal team also acted on your behalf in relation to the media, to ensure the removal of the social media posts and any electronic form of the article that was published on DD MM 20YY.

Your legal costs incurred totalled $X.

You were elected to the paid Position B of Entity A on DD MM 20YY, effective DD MM 20YY for a X-year term.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1.

Reasons for decision

Summary

Your legal expenses incurred in taking action against defamatory allegations are not deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as they are insufficiently connected with your income earning activities. Even if they were considered sufficiently connected to your income earning activities, the expenses are precluded from being deductible under section 8-1 of the ITAA 1997 as they are private or capital in nature.

Detailed reasoning

Section 8-1 of the ITAA 1997 allows a deduction for a loss or an outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature.

For legal expenses to constitute an allowable deduction, it must be shown that they are incidental or relevant to the production of the taxpayer's assessable income or business operations. Also, in determining whether a deduction for legal expenses is allowable 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) 3 AITR 436; (1946) 8 ATD 190).

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).

Expenses that have been incurred to obtain an elected position are considered to be incurred at a point too soon (Case V46 88 ATC 375). It was held by the Administrative Appeals Tribunal that a union official's claim for expenses relating to a re-election campaign were not deductible as they were incurred in obtaining a separate discrete period of employment and were regarded as the cost of an employee in obtaining their employment.

Even if an expense is considered to be incurred in gaining or producing assessable income, it will be excluded from being deductible under section 8-1 of the ITAA 1997 if it is private or capital in nature. Legal expenses are 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).

Application to your circumstances

Your legal expenses are not sufficiently connected to your income earning activities as they did not relate to your conduct while you were undertaking your day-to-day employment duties in either Position A or Position B of Entity A, rather they related to allegations about your conduct several decades ago.

The expenses were also incurred in order to achieve a promotion into a new income generating activity in Position B which is at a point too soon to be sufficiently connected to earning or producing assessable income and be allowable as a deduction.

In addition, the legal expenses were incurred to protect your good name and reputation and therefore are prevented from being deductible under section 8-1 of the ITAA 1997 as they are private and domestic or capital in nature.