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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.

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.