1012432041839 | Legal database

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Authorisation Number: 1012432041839

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Ruling

Subject: Legal expenses

Question

Are you entitled to a deduction for your legal expenses incurred?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

You previously worked as an employee.

You were injured in the process of doing your job.

You continued working on light duties until you were made redundant.

Payments for being injured on the job stopped as soon as you became redundant.

You engaged a solicitor to process your claim for compensation. You wished your weekly worker's compensation payments to continue.

You were granted weekly payments and a lump sum payment.

You incurred legal expenses.

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 a deduction for a loss or an outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature.

A number of significant court decisions have determined that for an expense to be an allowable deduction:

· it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. FC of T; (1958) 100 CLR 478),

· there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. FC of T, (1949) 78 CLR 47), and

· it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore Co (WA) Pty Ltd v. FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).

For legal expenses to constitute an allowable deduction, it must be shown that they are incidental or relevant to the production of the taxpayer's assessable income or business operations. Also, 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 that 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.

In Tax Determination TD 93/29 the Commissioner states that legal expenses incurred by an employee in recovering unpaid wages are deductible under section 8-1 of the ITAA 1997, as the expenses are directly incurred in the process of deriving assessable income. However, if legal action goes beyond a claim for a revenue item such as wages, the legal costs may not be deductible.

Legal expenses incurred in recovering salary or wages are considered to be of a revenue nature and therefore deductible under section 8-1 of the ITAA 1997.

In your case you incurred legal expenses in relation to continuing your weekly worker's compensation payments. As these payments represent a replacement of your salary and wages, they are considered to be revenue in nature and assessable. The associated legal expenses in relation to your unpaid worker's compensation payments relates sufficiently to the earning of your assessable income and are therefore deductible under section 8-1 of the ITAA 1997.

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