ATO Interpretative Decision

ATO ID 2001/654

Personal tax

• This ATO ID is amended to remove reference to superseded dollar threshold amount and to reconcile current terminology ('tax offset') with legislative wording of section 159P of the ITAA 1936.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is the taxpayer entitled to a medical expenses tax offset (also known as a rebate) under section 159P of the Income Tax Assessment Act 1936 (ITAA 1936) for the amount withheld from a compensation payment to recoup reimbursed medical expenses?

Decision

No. The taxpayer is not entitled to a medical expenses tax offset under section 159P of the ITAA 1936 for the amount withheld from a compensation payment to recoup reimbursed medical expenses.

Facts

The taxpayer sustained work related injuries.

The insurer of the taxpayer's employer has been paying weekly income maintenance.

The insurer has also been paying the taxpayer's medical expenses.

The insurer was not the taxpayer's agent and the taxpayer did not provide the insurer with funds from which they could make payment for their medical expenses.

The taxpayer accepted a lump sum compensation payment from the employer which extinguished any future liability of the employer.

An amount was deducted from the taxpayer's lump sum compensation payment to recoup the amount of medical expenses that were reimbursed by the employer's insurer.

Reasons for Decision

Subsection 159P(3A) of the ITAA 1936 provides that a rebate (tax offset) is allowable to a taxpayer whose net medical expenses in the year of income exceed the threshold dollar amount specified in the subsection

Subsection 159P(1) of the ITAA 1936 requires that in order for an amount to qualify as a rebatable amount it must be a medical expense 'paid by the taxpayer' in respect of themselves or their dependants.

The meaning of the words 'paid by the taxpayer' was dealt with in Case U223 87 ATC 1231; Tribunal Case 144 (1987) 18 ATR 4055. In that case a taxpayer was injured in an accident and was awarded damages. The insurer of the other party to the action paid the taxpayer's medical expenses. That amount was deducted from the final damages award. The taxpayer claimed the medical expense tax offset under section 159P of the ITAA 1936 in respect of the medical expenses paid by the insurer. The Administrative Appeals Tribunal stated that the taxpayer was not entitled to the tax offset as the taxpayer did not 'pay' medical expenses as required by subsection 159P(1) of the ITAA 1936.

The taxpayer's medical expenses were paid by the employer's insurer not by the taxpayer. The taxpayer's lump sum compensation payment was reduced by the amount of these payments so that the taxpayer was not compensated twice. The taxpayer has not 'paid' the medical expenses as required under subsection 159P(1) of the ITAA 1936. The taxpayer is therefore not entitled to a medical expenses tax offset under section 159P of the ITAA 1936.

Year of income:  Year ending 30 June 2002

Legislative References:
Income Tax Assessment Act 1936
   section 159P
   subsection 159P(1)
   subsection 159P(3A)

Case References:
Case U223 / Tribunal Case 144
   87 ATC 1231
   (1987) 18 ATR 4055

Keywords
Workers compensation income
Compensation for injury

Business Line:  Small Business/Individual Taxpayers

Date of publication:  30 November 2001

ISSN: 1445-2782