Edited version of private ruling

Authorisation Number: 1011486981209

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Ruling

Subject: Deductibility of legal expenses

1. Are you entitled to a deduction for the proportion of legal expenses incurred in seeking to recover loss of wages?

Yes.

2. Are you entitled to a deduction for the proportion of legal expenses incurred in relation to recouping medical expenses?

No.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You submitted a compensation claim against your employer.

The claim was denied.

You have been off work to the present day.

You attended conciliation which was unsuccessful.

You then engaged legal representation.

A decision was made in your favour ordering that you be compensated for back pay for weekly income earnings for a stipulated period.

You were also awarded reimbursement of medical expenses.

You received a lump sum payment from which your employer deducted Centrelink repayments.

A net amount was credited to your account in early 2010.

You incurred legal fees which you have paid.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows you a deduction for expenses that you incur that are directly related to the earning or generating of your assessable income. However, if those expenses are private, domestic or capital in nature, or relate to income that is exempt from tax, such deductions are not allowed.

In determining whether a deduction for legal expenses is allowable, the nature or character of the expenses must be looked at closely: they should have the same nature or character of the benefit that is sought to be gained by incurring the expenses.

Section 6-5 of the ITAA 1997 explains that your assessable income includes income according to ordinary concepts; referred to as ordinary income. Remuneration received as salary and wages is considered income according to ordinary concepts. Similarly, amounts paid for annual leave, including any additional payment for leave loading, is also ordinary income.

Alternatively, medical expenses are private in nature and therefore reimbursement of this amount is not included in your assessable income.

You incurred legal expenses and your intention of engaging legal assistance was to pursue a compensation claim for loss of earnings and to seek compensation for work related stress, harassment and bullying.

After successful proceedings, you received a lump sum comprising an amount for back pay to cover weekly income earnings for a stipulated period. In addition, you were reimbursed separately for medical expenses and received two cheques.

The amount you received to cover your weekly income earnings is assessable as ordinary income, however the reimbursement for medical expenses is private and is not assessable income. Therefore, your deduction for legal expenses will need to be apportioned according to the percentage of your payments that relates to your assessable income only.

Apportionment of expenses

As only a part of the legal expenses are allowable as a deduction you will need to make a reasonable apportion of the expenses. An example of this may be that the portion of your deduction will equal the percentage for which your payment relates to assessable income.