Case Study

Raven Flip was employed by a major Australian bank as a loans manager. He was charged with writing fraudulent loans for fictional customers and pocketing the loan proceeds once the loans were granted. The criminal charge was receiving money by deception in the amount of $10 million over a two-year period. Raven vigorously defended the charges and was subsequently acquitted. While he was defending the charges, he was suspended by his employer. Once he was acquitted Raven felt unable to return to his previous employment and started driving taxis. In defending the charges, he incurred legal fees of $550,000 including GCT. It was subsequently found that another employee at the bank had used Ravens identity to commit the fraud on the bank.

As a result of widespread notoriety of his acquittal which was published in the newspaper, he was informed by his ex-employer about an article that Honest Newspaper published in the newspaper regarding Raven.

Once again, Raven engaged his lawyers to bring an action, this time, in defamation against Honest Newspaper for publishing an untrue statement about him. Raven alleged Honest Newspaper caused harm and emotional distress to him because of the publication in the newspaper. Essentially, Raven sued the media broadcaster, Honest Newspaper over an article published in the newspaper that alleged him as a perpetrator in receiving money by deception. The newspaper did not mention Raven was acquitted of the charges and in fact, it was another employee at the bank had used Ravens identity to commit the fraud on the bank.

The legal proceedings were commenced in the Supreme Court of NSW, however, was settled at Mediation for an undisclosed amount. Raven was invoiced by his legal firm, $450,000 including GST for defending the claim against Honest Newspaper. Subsequently, Honest Newspaper withdrew the article published in the newspaper. Raven informed you that he incurred these legal expenses as part of his income producing structure and not income producing processes.

Required:

(a)Advise Raven whether the legal fees he incurred defending himself against the original criminal charges were a deductible outgoing. (10 marks)

(b)Advise Mr. Doolittle as to the deductibility of legal expenses in relation to the defamation matter? (10 marks)