Edited version of private advice

Authorisation Number: 1052330789718

Date of advice: 13 November 2024

Ruling

Subject: Deductions - legal expenses

Question 1

Can you deduct the legal expenses you incurred in accordance with section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are an academic and active researcher at a university.

You are employed on a fulltime basis, and you have a X.X FTE distribution of workload to carry out research and publish research papers.

In XX 20XX, you were accused by an individual (Person B) of 'infringement of intellectual property' for a paper you published.

On XX XX 20XX, you consulted a lawyer (the Lawyer).

You paid legal consulting fees and requested the Lawyer issue a letter to Person B to request them to stop their behaviour or further action could proceed.

The Lawyer issued you an invoice in the amount of $XXX for payment of an initial consultation fee.

You provided a Trust Ledger from the Lawyer itemising legal feeds in the amount of $X,XXX, the Trust Ledger provides a description detailing the topic of concern for you, was an 'Intellectual Property Dispute'.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Detailed reasoning

Section 8-1 of the ITAA 1997 allows for 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; (1956) 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 sought 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 significant 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 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).

The need for your legal expense arose out of your reaction to what you saw as damage to your credit and reputation. Where legal expenses are not sufficiently connected with incoming earning activities of a taxpayer and are essentially private or capital in nature or character; then they are not deductible under section 8-1 of the ITAA 1997.

Application to your circumstances

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