ATO Interpretative Decision
ATO ID 2002/505 (Withdrawn)
Income TaxLegal expenses incurred in pursuit of an assessable workers compensation claim
FOI status: may be released
This ATO ID is withdrawn and replaced by ATO ID 2010/209.This document has changed over time. View its history.
Status of this decision: Decision Withdrawn 19 November 2010
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Is the taxpayer entitled to claim a deduction for legal expenses incurred in pursuing a workers compensation claim under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Yes. The legal expenses incurred in pursuing a workers compensation claim are an allowable deduction under section 8-1 of the ITAA 1997 as the workers compensation payment is an assessable revenue receipt.
The taxpayer was injured in the workplace and claimed workers compensation.
The taxpayer's claim for workers compensation was rejected and legal assistance was sought with legal expenses incurred.
The taxpayer was successful in their claim and received an assessable compensation payment for lost earnings.
Reasons for Decision
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, or relate to the earning of exempt income.
The courts have considered the meaning of 'incurred in gaining or producing assessable income'. In Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 56 ALR 785; (1949) 8 ATD 431 the High Court stated that:
'For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing assessable it must be incidental and relevant to that end. The words "incurred in gaining or producing the assessable income" mean in the course of gaining or producing such income.'
In determining whether a deduction for legal expenses is allowable 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) 3 AITR 436; (1946) 8 ATD 190). The nature or character of the legal expenses follows the advantage which is sought to be gained by incurring the expenses.
If the advantage to be gained is of a capital nature then the expenses incurred in gaining the advantage will also be of a capital nature.
The fact that a capital payment is specifically brought to account as assessable income will not change the nature of the payment. An amount that is capital in nature will remain capital notwithstanding that it is specifically included in the assessable income of the taxpayer (e.g., an Eligible Termination Payment).
The legal expenses incurred by the taxpayer in order to obtain the worker's compensation payments resulted in the taxpayer gaining assessable income. Thus, there is a clear connection between the assessable income and the expense. The amount received by the taxpayer is to replace lost earnings and is therefore revenue in nature and not a capital receipt.
Accordingly, the legal expenses were incurred in gaining the taxpayer's assessable income and are deductible under section 8-1 of the ITAA 1997.Date of decision: 06 February 2002
Income Tax Assessment Act 1997
Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation
(1949) 78 CLR 47;
(1949) 56 ALR 785;
(1949)8 ATD 431
(1946)72 CLR 634;
(1946) 3 AITR 436;
(1946)8 ATD 190