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Edited version of your written advice
Authorisation Number: 1051246329310
Date of advice: 10 July 2017
Ruling
Subject: Deductions - legal expenses
Question 1
Are you entitled to claim a deduction for your legal expenses incurred in pursuing compensation, in the XXXX income years?
Answer:
No.
Question 2
Are you entitled to claim a deduction for a portion of your legal expenses incurred in pursuing a revenue claim in the XXXX income years?
Answer
Yes
This ruling applies for the following periods:
Year ended 30 June 2016
Year ended 30 June 2017
Year ended 30 June 2018
Year ended 30 June 2019
The scheme commences on:
01 July 2015
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
You suffered a work related injury.
You were awarded compensation and have been working in a graduated return to work.
You were deemed medically unfit to continue working.
You were informed that they would deny compensation. You disputed this and were told to put in a new claim.
You engaged a lawyer to purse a claim for workers compensation.
An objection was raised and the claim was reviewed for the injury.
A new claim was lodged.
The new claim was denied, reviewed and denied again.
Processes to have the decisions appealed by the AAT were started.
Medical reports were obtained for the pursing the claim.
All paid personal leave ran out. There is no income currently.
XXXX is seeking Counsel’s advice in relation to prospects and have requested the matter be listed for a conciliation conference and a request for hearing certificates to be issued.
Reasons for decision
These reasons for decision accompany the Notice of private ruling.
While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.
Summary
A portion of the expense you have incurred, are considered to be of a capital nature and are not deductible. Therefore, any deduction will need to be apportioned to reflect the dual purpose of the expenses incurred.
You are entitled to claim a deduction for the portion of your legal expenses that related to your revenue claim, the Comcare payments.
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.
To qualify for deduction under section 8-1 of the ITAA 1997, a loss or outgoing must have been 'incurred’. The meaning of 'incurred’ is discussed in Taxation Ruling TR 97/7. There is no statutory definition of the term 'incurred' however; generally, a loss or outgoing is incurred when a taxpayer has a presently existing liability to pay or actually has paid the expense.
Generally, legal expenses have been held to be deductible if the expenses are directly related to the earning of income.
In Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 3 AITR 436; (1946) 8 ATD 190, the Court established that in determining whether a deduction is allowable under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered. The nature or character of the legal expenses follows the advantage which is sought to be gained by incurring the expenses. Dixon J stated at CLR 647 that:
...legal expenses...take the quality of an outgoing of a capital nature or of an outgoing on account of revenue from the cause or purposes of incurring the expenditure. We are, therefore, remitted to a consideration of the object in view when the legal proceedings were undertaken, or of the situation which impelled the taxpayer to undertake them.
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 your case, you have incurred legal expenses for duel purposes. Firstly, in order to receive on-going Comcare payments and, secondly, to receive a lump sum compensation payment in respect of your personal injuries claim. While the advantage sought in pursuing the Comcare payments was of a revenue nature, the lump sum compensation payment, in respect of your personal injuries claim, was of a capital nature.
Taxation Determination TD 93/29 discusses the deductibility of legal expenses incurred in recovering an amount for wages and states that if legal action goes beyond a claim for a revenue item such as wages, and constitutes an action for breach of the contract of employment, the legal costs would not be deductible because they are capital in nature.
As the nature or character of legal expenses follows the advantage that is sought to be gained by incurring the expenses, a portion of the expenses you have incurred are considered to be of a capital nature and are not deductible. Therefore, any deduction will need to be apportioned to reflect the dual purpose of the expenses incurred.
Apportionment of expenses
TD 93/29 also discusses the apportionment of legal expenses.
Where legal expenses are incurred in relation to proceedings that relate both to amounts that are revenue in nature as well as amounts which are capital in nature, there must be some fair and reasonable assessment of the extent of the relation of the outlay to assessable income.
Where the solicitors 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 solicitors 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.
Relevant legislative provisions
Income Tax Assessment Act 1997 (ITAA 1997) – section 8-1
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