Private ruling: Legal expenses
Published: September 2011
Ruling period: Year ended 30 June 2009 | Year ended 30 June 2010 | Year ended 30 June 2011
Date scheme commenced: 1 July 2008

Ruling: Q1: Are you entitled to a deduction for legal expenses you incurred to defend yourself against a defamation action? | A1: Yes.

Relevant facts and circumstances: You were a sitting politician. While you were in this employment, you made public comments regarding an issue that was of a high concern for your constituents. As a result, you were issued with a notice of defamation by another public figure. You incurred legal expenses to defend the defamation action.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1

Reasons for decision: Summary: You are entitled to a deduction for the legal expenses you incurred to defend a defamation action that was brought against you, for comments you made when representing the views of your constituents. As we consider this to be a part of your day-to-day activities as a Member of Parliament, the legal expenses were incurred in producing your assessable income. | Detailed Reasoning - Detailed reasoning: 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. 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 and the expense may arise out of litigation concerning the taxpayer's professional conduct. In FC of T v. Rowe (1995) 131 ALR 622; 31 ATR 392; (1995) 60 FCR 99; 95 ATC 4691, an employee incurred legal expenses in defending the manner in which he performed his employment duties. In affirming that the legal expenses were allowable, Beaumont J stated at page 4699: 'since the inquiry was centrally concerned with the day to day aspects of the respondent's employment, it ought to be concluded that the respondent's costs of representation before the Inquiry was incurred by him in gaining assessable income.' Further, Burchett J commented at page 4702: 'the legal expenses of the taxpayer were incurred by the taxpayer in defending the manner of his performance of his duties. It was only by so justifying himself that he could make a successful defence against dismissal' Taxation Ruling TR 1999/10 discusses the deductions allowable to Members of Parliament. The Ruling states that a deduction is allowable for legal expenses incurred by a Member in defending the day-to-day activities through which he or she gains or produces assessable income (work-related activities), if the losses or outgoings are not capital, private or domestic in nature. | Detailed Reasoning - Application to your case: In your case, you have incurred legal expenses in defending a defamation claim. The defamation proceedings were brought against you, for comments you made when representing the views of your constituents. As part of your role as sitting politician you could reasonably be expected to comment on current issues that affect the constituency for which you represent. As such, a defamation proceeding resulting from your comments could be seen to relate to your day-to-day income producing activities as a sitting politician. Consequently, you are entitled to claim a deduction for the legal expenses that you incurred to defend the defamation action under section 8-1 of the ITAA 1997.

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