Edited version of your written advice

Authorisation Number: 1013057030244

Date of advice: 21 July 2016

Ruling

Subject: Legal case and expenses

Question 1

Are you entitled to a deduction for your internet expenses incurred in relation to your legal matters?

Answer

Yes.

Question 2

Are you entitled to a deduction for a portion of your phone expenses incurred?

Answer

Yes.

Question 3

Are you entitled to a deduction for a portion of your electricity expenses?

Answer

Yes.

Question 4

Are you entitled to a deduction for your stationary and postage expenses incurred?

Answer

Yes.

Question 5

Are you entitled to a deduction for the full cost of your computer purchase?

Answer

No.

Question 6

Are you entitled to a deduction for the depreciation of your computer?

Answer

Yes.

Question 7

Are you entitled to a deduction for your car parking fees incurred to see your legal representative and to attend court where you have the relevant records?

Answer

Yes.

Question 8

Are you entitled to a deduction for the full cost of your car expenses?

Answer

No.

Question 9

Are you entitled to a deduction for your car expenses using the cents per kilometre method?

Answer

Yes.

Question 10

Are you entitled to a deduction for the interest expenses incurred for your loan?

Answer

Yes.

Question 11

Are your hospital fees and cost of medications regarded as medical expenses for the purposes of calculating your medical expenses tax offset for the 20xx-yy financial year?

Answer

Yes.

Question 12

Are you entitled to a medical expenses tax offset in the 20yy-zz financial year?

Answer

No.

Question 13

Will your entitlement to any additional private health insurance tax offset be calculated after you have lodged your tax return?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 20yy

Year ended 30 June 20zz

The scheme commenced on

1 July 20xx

Relevant facts

You went to see legal representatives to help you in relation to your unpaid income.

Your legal expenses are an allowable deduction.

You borrowed money to pay your representative. You incurred interest expenses for this loan.

You received a back pay in the 20yy-zz financial year.

You incurred the following expenses in relation to the dispute for the 20xx-yy financial year:

• Phone

• internet expenses,

• Purchase of a computer,

• Car parking fees,

• Car expenses such as insurance, registration, petrol and repairs

• Stationary and postage costs

• Electricity

None of the expenses were reimbursed.

Your internet was mainly used for your legal case, however you also used the computer for approximately 20 minutes. You did not use the computer for other purposes.

A portion of your mobile phone account is related to your legal case. You calculated the work related portion based on the number of calls. Some of the calls would be up to an hour at mobile costs. You also tethered your phone to your tablet to enable you to complete urgent documents for your legal representative if you weren't home. Before and after the hearings you spoke to your legal representative each day. At other times it was two to three times a week.

You used your home office and computer 15 hours per week for your legal case. You used your tablet for your other internet purposes.

In January 20yy you purchased a new computer to use for your legal case.

You didn't keep a diary of your computer or home office usage in relation to your legal case. You live alone and no one else uses the computer.

Your home office is one room of your home. It contains your computer, electric landline, wi-fi modem, fax, printer, scanner and lighting. All except the lighting are on at all times.

You calculated your work related electricity expenses.

Your car parking fee to visit your legal representative for four hours was $X. You also paid other car parking fees, however don't have receipts for all the fees.

You used your car to travel to your legal representative and court.

You travelled more than 2500km for your legal matters in the 20xx-yy financial year.

You did not keep a log book showing your travel details.

You own a car which has an engine capacity of 2.7L.

You have incurred expenses for your vehicle registration, insurance, petrol and wear and tear.

You have had many medical expenses.

In late 20xx you paid hospital fees for your operations.

In early 20yy you paid more hospital fees for other surgery.

You also had expenses for your medications which you purchased from chemists. You have receipts for most of your medical expenses.

You received a medical expenses tax offset in the 20vv-ww and 20ww-xx financial years.

You have private health insurance.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Allowable deductions

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, or relate to the earning of exempt income, or a provision prevents you from deducting it.

A deduction is only allowable if an expense:

• is actually incurred,

• meets the deductibility tests, and

• satisfies the substantiation rules.

Internet expenses

A deduction is allowable for the internet costs of researching work related matters and other matters directly relating to your assessable income and deductible expenditure.

As your lump sum payment is assessable and your legal expenses are deductible, the associated internet expenses are an allowable deduction. As the main purpose and use of the internet during the 20xx-yy financial year was for your legal case and your unpaid income, the related expenses are fully deductible under section 8-1 of the ITAA 1997 notwithstanding the existence of an incidental private purpose. Therefore you are entitled to a deduction for the relevant internet expenses.

Telephone expenses

A deduction is allowable for the cost of work-related calls. In your case the cost of calls to your legal representative in relation to your legal case are an allowable deduction.

Deductible calls can be identified either from an itemised telephone account, or from keeping a diary over a representative four week period which will establish a pattern of your work related usage. From this information, the number of work calls made as a percentage of total calls made and the amount of time spent on work calls as a percentage of your total calls can be determined to calculate the deductible portion.

In your case you advised that a percentage of your phone account related to your legal case based on the number of calls made and the time spent on your legal calls. Therefore you are allowed a deduction for this portion of your phone expenses in the 20xx-yy year.

Home office and electricity expenses

A deduction is generally not allowable for the costs associated with a person's home as they are private in nature. However, a taxpayer who carries on part of their income earning activities at home may be entitled to a deduction for part of the outgoings on the home.

TR 93/30 Income tax: deductions for home office expenses examines the deductibility of running expenses relating to the use of a home office and the associated costs such as electricity.

A deduction for running costs is only allowed where additional running costs are incurred because of your income producing activities. That is, the amount you are entitled to claim is the difference between what was actually paid for electricity and what would have been paid had you not used the room for income producing purposes.

In your case, as you used your home office for your legal case, a deduction is allowable for the additional running expenses such as electricity used exclusively for this purpose.

TR 93/30 details, at paragraphs 19 to 27, how to calculate additional running expenses. Alternatively, the Tax Office accepts a fixed rate of 45 cents per hour for home office expenses for heating, cooling, lighting and the decline in value of office furniture instead of keeping details of actual costs. To use this method, you need to keep a record of the number of hours you use the home office for work related purposes and multiply that by 45 cents per hour.

Stationary and postage

A deduction is allowed for the cost of postage and stationery used in relation to your legal matters. Therefore you are entitled to a deduction in your 20xx-yy tax return.

Depreciation of computer

Section 40-25 of the ITAA 1997 allows a deduction for the decline in value (depreciation) of a depreciating asset you hold, to the extent the asset is used for a taxable purpose.

Your computer is regarded as a depreciating asset for Division 40 of the ITAA 1997 purposes. A deduction for its decline in value is an allowable deduction when it is used for income producing purposes.

Please note the computer is a capital item and therefore a deduction for the purchase cost is not an allowable deduction under section 8-1 of the ITAA 1997.

To calculate the allowable deduction for a depreciating asset, the effective life of the asset is needed as well as the number of days you had the computer. Generally a computer is said to have an effective life of four years. To calculate the allowable depreciation amount, you can use the diminishing value method or the prime cost method.

For more information in relation to depreciation, please refer to Guide to depreciating assets which is available on the website www.ato.gov.au.

Car parking fees

A deduction is allowed for car parking fees incurred that directly relate to your assessable income. Therefore the parking fees paid to attend court and to visit your legal representative in relation to your legal case are allowable deductions where you have the relevant records to show the amounts of your fees.

Car expenses

Section 28-12 of the ITAA 1997 provides that a deduction for car expenses can be made using one of the four methods if the taxpayer owned or leased a car.

Where your work related car travel is less than 5,000km for the year, there are only two methods available - the logbook method and the cents per kilometre method. As you haven't kept a log book, you need to calculate your car expenses using the cents per kilometre method.

Where you use the cents per kilometre method, the ATO rate covers all the running expenses of the car and no additional deduction is allowed for your car insurance, registration, repairs, wear and tear or petrol. The relevant rate for your car is 77c/km.

Therefore your allowable deduction for your car expenses is A x 77c = $B

Interest expenses

Generally, interest expenses incurred for income producing purposes are deductible under section 8-1 of the ITAA 1997, to the extent that it is not capital, private or domestic in nature. The essential character of the expense is a question of fact to be determined by reference to all the circumstances.

Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith provides the Commissioner's view regarding the deductibility of interest expenses. As outlined in TR 95/25, there must be a sufficient connection between the interest expense and the activities which produce assessable income. TR 95/25 specifies that to determine whether the associated interest expenses are deductible, regard must be given to all the circumstances including the purpose of the borrowing and the use to which the borrowed funds are put.

The interest incurred will generally be deductible to the extent that the borrowed funds are used to produce assessable income or to pay for a deductible expense.

In your case you incurred interest expenses in relation to a bank loan used to pay your legal fees. As your legal fees are an allowable deduction, the associated interest expenses are an allowable deduction under section 8-1 of the ITAA 1997.

You need to calculate the amount of interest from your bank statements that is incurred in each year and include the relevant amounts on your 20yy and 20zz tax returns.

Medical expenses tax offset

A medical expenses tax offset is available under subsection 159P(1) of the Income Tax Assessment Act 1936 (ITAA 1936) where you pay certain medical expenses in an income year for yourself or a dependant who is an Australian resident, to the extent that you are not reimbursed, or are eligible to be reimbursed, from a government or public authority or a society, association or fund.

Under changes to the legislation, the medical expenses tax offset is being phased out.

To be eligible to claim a medical expenses tax offset in 20xx-yy, you must have either:

• received this offset in your 20vv-ww and 20ww-xx income tax assessments, or

• paid for medical expenses relating to disability aids, attendant care or aged care.

To be eligible to claim a medical expenses tax offset for the 20yy-zz financial year, you must have paid for medical expenses relating to disability aids, attendant care or aged care.

In your case, as you received a medical expenses tax offset in your 20ww and 20xx assessments you can include certain medical expenses in calculating your medical expenses tax offset for the 20xx-yy financial year.

For the 20xx-yy financial year your "medical expenses" includes payments to a legally qualified medical practitioner, nurse or chemist, or a public or private hospital, in respect of an illness or operation.

Therefore your payments to a hospital or chemist in relation to an illness or operation can be included in your medical expenses.

Membership fees paid to a private health company are not regarded as medical expenses and cannot be used in calculating your medical expenses tax offset.

You should include your allowable medical expenses on your 20yy tax return and we will calculate your allowable tax offset. The hospital fees can be included. The cost of medications purchased from a chemist can also be included where you have the necessary receipts. Please note that the calculation of the tax offset depends on your taxable income.

As your medical expenses do not relate to disability aids, attendant care or aged care you are not entitled to a medical expenses tax offset for the 20yy-zz financial year.

Private health insurance tax offset

If you have private health insurance cover, you may be eligible for the private health insurance (PHI) rebate/tax offset.

You can claim the rebate as either a premium reduction or a refundable tax offset.

In your case your statements show that you have claimed the rebate as a reduction in the amount of premiums you paid to your insurer. The rebate is income tested, which means that if you have a higher income, your rebate entitlement may be reduced, or you may not be entitled to any rebate at all.

You need your private health insurance statements to complete your tax return. Where you have more than one statement or more than one line of information on your statement table, you need to input these separately on your tax return.

After you have lodged your tax return, we calculate any additional tax offset that you may be entitled to. If you are entitled to a tax offset this will be included on your notice of assessment.

Record keeping

You need to keep records of your expenses incurred for tax purposes.

Records such as receipts or other written evidence of your expenses, including receipts for depreciating assets you have purchased need to be kept. Where some expenses relate to both tax and other purposes, you need to keep a diary over a representative four-week period in each income year to show how much you used your equipment, such as phone or computer or internet, for work related purposes and for other purposes. Where phone expenses are claimed, you should keep itemised phone accounts from which you can identify work-related calls.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).