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Edited version of private ruling
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Ruling
Subject: Deduction - legal expenses
1. Are you entitled to a deduction for legal fees incurred in obtaining compensation for lost wages from the insurer?
Yes.
2. Are you entitled to a deduction for legal fees incurred for the recovery of medical expenses from the insurer?
No.
Relevant facts and circumstances
You suffered a work place injury.
You applied to your employer's insurance company to receive compensation for lost wages and medical expenses.
Your claim for compensation was denied by the insurer.
You sought legal advice to recover the lost wages and medical expenses from your employer's insurer.
You claim was subsequently allowed by the insurer.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1.
Reasons for decision
Summary
You are entitled to a deduction for the legal expenses that relate to the claim for the loss of wages. Any legal expenses incurred for the recovery of the medical expenses is not deductible as they are private in nature.
Detailed reasoning
Section 8-1 of the Income Tax Assessment Act 1997 (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.
In determining whether a deduction for legal expenses is allowable, the nature or character of the expenditure must be considered, that is, whether the legal expenses are incurred for a capital or a revenue purpose (Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 8 ATD 190; (1946) 3 AITR 436).
The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses. For example, if the advantage to be gained is of a capital nature, then the legal expenses incurred in gaining the advantage will also be of a capital nature and are not deductible.
Taxation Determination TD 93/29 which considers the deductibility of legal expenses states that where legal expenses are incurred by an employee (or a former employee) in pursuing a legal action against their employer (or former employer) to recover amounts owing of a revenue nature such as wages, the legal expenses are an allowable deduction.
In your case, you incurred some of your legal expenses to obtain a payment which is revenue in nature. This payment consists of back-payments of wages in regard to your workers compensation claim. Accordingly, your legal expenses attributable to this claim are of a revenue nature and are deductible under section 8-1 of the ITAA 1997. However, the medical expenses are private in nature. Therefore, the legal expenses relating to your claim for the medical expenses are also considered private in nature and not deductible under section 8-1 of the ITAA 1997.
In summary as the legal expenses are incurred in relation to proceedings that relate to both amounts that are private and revenue in nature, a reasonable apportionment is required to determine the portion of the legal expenses that are deductible. TD 93/29 states that:
Where the solicitor's account is itemised, one reasonable basis for apportionment would be the time spent involving the revenue claim, relative to the time spent on the capital claim. If the solicitor's account is not itemised, a possible basis for apportionment would be either a reasonable costing of the work undertaken by the solicitor in relation to the revenue claim, or, where this is not possible, an apportionment on the basis of the monetary value of the revenue claim relative to the capital claim.
You should apply the above principles in determining the portion of the legal expenses that relate to the claims for the loss of wages and the medical expenses.
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