Trading expenses and losses are generally only allowed as tax deductions if they are incurred “in the production of income”. So what happens when you are sued – for damages perhaps – and incur substantial legal costs in defending yourself? Are you denied tax relief on those costs purely because they don’t relate to the bringing in of income?

Good news in this regard comes from last year’s Tax Court ruling in favour of a provincial Premier, who was sued for defamation arising from statements he made about an ex-colleague during an official press conference. The Premier lost the case, and attempted to soften the financial blow by deducting from his earnings both the legal costs and the damages award. There was a lot at stake (as there tends to be when protracted litigation is involved) – legal costs of R452.000 in addition to the damages award of R35.000. SARS disallowed these deductions, but was overruled by the Court.

This is good news for taxpayers generally, and it stems from the fact that the “production of income” rule does not apply to legal expenses. All you need prove is that the “claim, dispute or action at law” relates to “ordinary operations undertaken........in the carrying on of [your] trade”. Note however that “expenditure of a capital nature” is excluded, and that there are complex issues involved here, with plenty of grey areas - so specialist advice based on the facts of each case is essential.

The second bit of good news is that even if you are – like the Premier – a salaried employee, you can still take advantage of this break. Strangely enough, you are for this purpose considered to be “carrying on a trade”, because “trade” is defined as “every profession, trade, business, employment, calling, occupation or venture.....”!