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Edited version of private ruling

Authorisation Number: 1011569262445

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Ruling

Subject: Deductibility of legal expenses

1. Are you entitled to a deduction for legal costs incurred in the 2008-09 income year as a result of a motor vehicle accident that happened during the course of your employment?

Yes.

2. Are you entitled to a deduction for the agreed settlement sum paid in the 2008-09 income year in full and final satisfaction of the debt incurred as a result of a motor vehicle accident that happened during the course of your employment?

Yes.

This ruling applies for the following period:

Year ended 30 June 2009

The scheme commenced on:

1 July 2008

Relevant facts and circumstances

You were working for a company and you were asked to attend a meeting by the Director of that company as he was unavoidably detained.

He requested that you travel to a site to deliver documentation and represent the company.

You were involved in a motor vehicle accident with another person whilst travelling to the site of the meeting. The accident occurred in the 2004-05 income year.

You were driving your spouse's car and not a company car.

The other person commenced an action against you in the 2006-07 income year for damages and loss as a result of the accident.

The claim was for negligence plus costs and interest.

You and the other person reached an agreement in the 2008-09 income year that the matter be settled in full and final satisfaction of the debt for a stipulated amount.

You agreed to pay the agreed amount in full in the 2008-09 income year.

Your employer recommended a solicitor for you to use and paid an amount directly to that solicitor to assist you with your legal expenses. This was not paid in the 2008-09 income year.

The costs relating to the injuries you sustained were covered by Workcover.

You have not received any money from any source relating to this matter other than that mentioned from your employer.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows you a deduction for all losses or outgoings as long as they are incurred while you are in the process of gaining or producing your assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, no deduction is allowable where the losses or outgoings are of a capital, private or domestic nature or another provision prevents the deduction.

It follows that expenditure in the form of compensation or damages paid to a third party will be an allowable deduction under section 8-1 of the ITAA 1997 if it is incurred in the course of gaining or producing your assessable income, and the expense is not of a capital, private or domestic nature.

In one particular case, a lawn mowing contractor caused a motor accident while driving in the course of his work. In making its decision, the Board of Review applied the 'incidental and relevant' test from the decision of a previous High Court case and held that the payments made to the other parties involved in the accident were deductible because:

You were involved in a motor vehicle accident while performing your duties at the direction of your employer. The other person involved in the accident commenced an action against you for damages and loss as a result of the accident.

As the accident occurred while you were travelling in the course of your employment, the expenses incurred to pay the damages to the other party involved in the accident are considered incidental and relevant in gaining your assessable income and are not capital, private or domestic in nature.

Accordingly, you are entitled to a deduction under section 8-1 of the ITAA 1997 for the legal expenses incurred as a result of the motor vehicle accident you were involved in while performing your duties.

Similarly, you are entitled to a deduction for the agreed settlement sum paid in the 2008-09 income year in full and final satisfaction of the debt incurred as a result of a motor vehicle accident that happened during the course of your employment.

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