Edited version of private advice

Authorisation Number: 1052365214044

Date of advice: 25 February 2025

Ruling

Subject: Deductions - legal expenses

Question

Can you claim a deduction for the professional fees and expenses incurred in relation to your income protection claim under section 8-1 of the income Tax Assessment Act 1997?

Answer

Yes.

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.

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.

An amount paid to compensate for loss generally acquires the same nature of what it is substituting (FC of T v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (FC of T v. Inkster (1989) 20 ATR 1516; 89 ATC 5142; Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641; Case Y47 (1991) 22 ATR 3422; 91 ATC 433).

Income protection policies provide for periodic payments in the event of loss of income caused by the insured becoming disabled through sickness or injury. These payments form part of assessable income as ordinary income under section 6-5 of the ITAA 1997, as they are paid to take the place of lost earnings.

Based on the information provided it is viewed that the costs of the professional fees and expenses of Company B can be deducted under Section 8-1 of the ITAA 1997 as they were incurred in relation to the receipt of your assessable income amounts.Therefore, you can claim a deduction for the costs incurred as a result of the legal activities undertaken by Company B in relation to your income protection claim.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You suffered health issues which prevented you from being able to work.

You engaged the services of Company A to lodge an income protection claim through your super fund in relation to an income protection policy (the Policy) they had with Company B.

The income protection claim was successful with you receiving a gross amount (the Gross Amount) relating to earlier income years, prior to the ruling period.

Company B identified the benefits received under the Policy were assessable for income tax purposes and Pay As You Go (PAYG) withholding amounts were withheld in relation to the Gross Amount you received in relation to the claim.

You are entitled to receive income protection payments for the subsequent income years after the earlier earlier income years up to an age to be confirmed by Company B subject to you meeting the relevant conditions. PAYG withholding amounts will also be withheld from those amounts.

You received a tax invoice from Company A for their professional fees and expenses arising from their activities in relation to your income protection claim, which you paid during the ruling period.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

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).