ATO Interpretative Decision

ATO ID 2002/193

Income Tax

Legal Expenses incurred in gaining compensation for loss of salary and wage income
FOI status: may be released

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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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.

Issue

Are the legal expenses incurred in obtaining a Total and Permanent Disability benefit an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The legal expenses incurred in obtaining a Total and Permanent Disability benefit are an allowable deduction under section 8-1 of the ITAA 1997.

Facts

The taxpayer received a lump sum payment in respect of a Total and Permanent Disability benefit. The benefit forms part of the taxpayer's taxable income in the year in which it is received.

The taxpayer incurred legal expenses in obtaining this payment.

Reasons for Decision

Section 8-1 of the ITAA 1997 states that you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing assessable income and is not:

•
Capital, private or domestic in nature
•
Incurred in gaining or producing exempt income
•
Prohibited by a section of the ITAA 1997 or the Income Tax Assessment Act 1936

The legal expenses incurred by the taxpayer in order to obtain the benefit resulted in the taxpayer gaining assessable income. Thus, there is a clear connection between the assessable income and expense.

The legal expenses do not meet the criteria for the three exceptions to deductibility listed above. Thus, the legal expenses have the essential character of an outgoing incurred in gaining assessable income.

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:  01 February 2002

Year of income:  Year ended 30 June 2001

Legislative References:
Income Tax Assessment Act 1936
   The Act

Income Tax Assessment Act 1997
   Section 8-1

Keywords
Compensation expenses
Legal expenses

Siebel/TDMS Reference Number:  DW220492

Business Line:  Small Business/Individual Taxpayers

Date of publication:  28 February 2002

ISSN: 1445-2782

history
  Date: Version:
You are here 1 February 2002 Original statement
  13 June 2014 Updated statement

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