Edited version of private advice

Authorisation Number: 1051963989590

Date of advice: 23 March 2022

Ruling

Subject: Deductions - legal and medical expenses

Question 1

Are you entitled to a deduction for legal expenses incurred in relation to the claim you made against your income protection insurance policy (the claim) under section 8-1 of the Income Tax Assessment Act 1997?

Answer 1

Yes

Question 2

Are you entitled to a deduction for expenses incurred for medical assessments in relation to the claim you made against your income protection insurance policy (the claim) under section 8-1 of the Income Tax Assessment Act 1997?

Answer 2

Yes

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You sustained an injury outside of work.

As a result, you took leave from your employment for a period of several months.

You took leave to focus on your rehabilitation and recovery as you were not able to perform your usual role after sustaining your injury.

You returned to work in Month 20XX on a return-to-work plan, commencing part-time.

You made a claim against your stand-alone income protection policy.

The policy pays a monthly income protection benefit.

You incurred legal and medical expenses in relation to making this claim against your income protection insurance.

You engaged a law firm to prepare and submit your claim for income protection insurance benefits and liaise with your insurer.

You paid the legal fees in full by credit card.

You incurred medical expenses for consultations with your general practitioner. The medical expenses you incurred were solely for the purpose of completing claim forms required by your insurer and were not related to your treatment.

The payments you received were a monthly income replacement benefit. They were calculated pro rata during the period you were working part time. The payments weren't paid monthly due to the time taken for your claim to be assessed, approved, and reviewed by the insurer.

You have included the income received in your income tax returns.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Question 1

Are you entitled to a deduction for legal expenses incurred in relation to the claim you made against your income protection insurance policy (the claim) under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

The expenses you incurred relate directly to the earning of your assessable income and are therefore deductible under section 8-1 of the ITAA 1997.

Detailed reasoning

Legal Expenses

Section 8-1 of the 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.

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.

Application to your circumstances

The legal expenses incurred by you in order to obtain the income protection insurance payments resulted in you gaining assessable income. Thus, there is a clear connection between the assessable income and the expense. The amount received by you is to replace lost earnings and is therefore revenue in nature and not a capital receipt.

Accordingly, the legal expenses in relation to income protection policy were incurred in gaining your assessable income and are deductible under section 8-1 of the ITAA 1997.

Question 2

Are you entitled to claim a deduction for medical expenses incurred in relation to the claim you made against your income protection insurance policy under section 8-1 of the Income Tax Assessment Act 1997?

Summary

The expenses you incurred relate directly to the earning of your assessable income and are therefore deductible under section 8-1 of the ITAA 1997.

Medical expenses

Generally medical expenses have no direct connection to the gaining or producing of assessable income and a deduction is not allowable. Medical expenses for treatment and rehabilitation have a private character, even if they are a requirement for receiving assessable income. Subsection 8-1 (2) of the ITAA 1997states that you cannot deduct a loss or outgoing if it is of a private or domestic nature.

However, where it can be shown that a medical expense has the required nexus between the expense and earning of assessable income, the expense may be deductible. Where the expense is required for payment of income protection benefits, there is a direct connection between the expense and the earning of assessable income.

In Taxation Ruling TR 95/19 Income tax: airline industry employees - allowances, reimbursements and work-related deductions the Commissioner has stated that a deduction is allowable for the expenses of medical examinations required for the renewal of relevant licences.

Application to your circumstances

You were required to fulfil certain requirements to receive assessable income protection payments, namely obtain reports from a medical practitioner. As such the expenses for the reports are expenses incurred to establish and retain your income protection payments. Therefore, you are entitled to a deduction for the amounts paid to your medical practitioner to receive the required medical reports.

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