ATO Interpretative Decision

ATO ID 2001/654 (Withdrawn)

Income Tax

• This ATO ID is withdrawn. Guidance on the Net Medical Expenses Tax Offset can be found at Medical expenses on the ATO website (QC 31918).
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is the taxpayer entitled to a medical expenses tax offset for the amount withheld by the insurer from a compensation payment for the medical expenses previously paid by the insurer under section 159P of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision

No. The taxpayer is not entitled to a medical expenses tax offset for the amount withheld by the insurer from a compensation payment for the medical expenses previously paid by the insurer under section 159P of the ITAA 1936.

Facts

The taxpayer sustained work related injuries.

The insurer of the taxpayer's employer has been paying the taxpayer's medical expenses.

The insurer was not the taxpayer's agent and the taxpayer did not provide the insurer with funds from which they could make payment for their medical expenses.

The taxpayer accepted a lump sum compensation payment from the employer which extinguished any future liability of the employer.

An amount was deducted from the taxpayer's lump sum compensation payment for the amount of medical expenses that were paid by the employer's insurer.

Reasons for Decision

Section 159P of the ITAA 1936 provides that a taxpayer is entitled to a rebate (medical expenses tax offset) where the taxpayer's net medical expenses (rebatable amount) in the year of income exceed the threshold dollar amount specified in the subsection 159P(3A).

Subsection 159P(1) of the ITAA 1936 requires that in order for an amount to qualify as a rebatable amount it must be a medical expense 'paid by the taxpayer' in respect of themselves or their dependants.

The meaning of the words 'paid by the taxpayer' was considered in Case U223 87 ATC 1231; Tribunal Case 144 (1987) 18 ATR 4055. In that case a taxpayer was injured in an accident and was awarded damages. The insurer of the other party to the action paid the taxpayer's medical expenses and was entitled to a credit for that amount when the damages were awarded. The taxpayer claimed the medical expenses tax offset under section 159P of the ITAA 1936 in respect of the medical expenses paid by the insurer. The Administrative Appeals Tribunal held that the taxpayer was not entitled to the tax offset because the taxpayer did not 'pay' the medical expenses as required by subsection 159P(1) of the ITAA 1936.

The taxpayer's medical expenses were paid by the employer's insurer not by the taxpayer. The taxpayer's lump sum compensation payment was reduced by the amount of these payments so that the taxpayer was not compensated twice. The taxpayer has not 'paid' the medical expenses as required under subsection 159P(1) of the ITAA 1936. The taxpayer is therefore not entitled to a medical expenses tax offset under section 159P of the ITAA 1936.

Amendment History

Year of income:  Year ending 30 June 2002

Legislative References:
Income Tax Assessment Act 1936
   section 159P
   subsection 159P(1)
   subsection 159P(3A)

Case References:
Case U223 / Tribunal Case 144
   87 ATC 1231
   (1987) 18 ATR 4055

Keywords
Compensation for injury
Deductions & expenses
Medical expenses
Medical expense rebates
Rebates and offsets

Business Line:  Small Business/Individual Taxpayers

Date of publication:  30 November 2001

ISSN: 1445-2782