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Edited version of private ruling
Authorisation Number: 1011610203330
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Ruling
Subject: Deductibility of legal expenses
1. Are you entitled to a deduction for legal expenses in relation to seeking reinstatement of your reimbursement of medication, physical therapy and other medical treatments?
No.
2. Are you entitled to a deduction for legal expenses in relation to seeking reinstatement of your reimbursement of your homecare assistance?
No.
This advice applies for the following period:
Year ended 30 June 2010
The scheme commenced on:
1 July 2009
Relevant facts
You have a work-related injury.
Liability has been accepted through the workers compensation insurer.
When you are unable to work you receive your salary from your employer which is paid through the insurer.
The insurer also reimburses you for the costs of medication, physical therapy, other treatment as prescribed by your doctor and homecare assistance.
You have tax deducted from the salary that you receive via the insurer, however you do not tax deducted from the reimbursements received from the insurer.
Earlier this year the insurer ceased liability for these reimbursements and you engaged a lawyer to dispute this decision.
The decision was overturned and liability has been reinstated.
You have incurred lawyer's fees.
Your arguments and references
The injury is work-related. Therefore, if it were not for the injury you would not have engaged the lawyer.
You consider this a work-related expense.
Relevant legislative provisions
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 all losses and outgoings as long as they are incurred in the course of gaining or producing your assessable income except where those expenses 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, it has to be determined whether the legal expenses are incurred in the course of producing your assessable income: the nature or character of the legal expenses follows the benefit that is to be gained by incurring the expenses. For example, if the benefit to be gained is of a private or domestic nature, then the legal expenses incurred in gaining the benefit will also be of a private or domestic nature and will not be deductible.
Taxation Determination TD 93/29, which considers the deductibility of legal expenses, states that where such expenses are incurred by an employee (or a former employee) in pursuing a legal action against their employer (or former employer) to recover amounts owing of a revenue nature such as wages, the legal expenses are an allowable deduction.
In your case, you have a work-related injury and liability had been accepted through the workers compensation insurer in the form of reimbursement of your costs of medication, physical therapy and other medical treatments and homecare assistance. After the insurer ceased any future reimbursements for these entitlements you engaged a lawyer and incurred legal expenses to dispute their decision which was consequently overturned.
In considering the nature of the legal expenses that you have incurred, the benefit you sought in engaging the lawyer was the restoration of reimbursements for the costs of medication, physical therapy, other treatments as prescribed by your doctor and homecare assistance costs. These benefits are considered private or domestic in nature and therefore the legal expenses that you have incurred in seeking restoration of these reimbursements are also considered private or domestic in nature.
Following the further information that you have provided, we note the payments were not in a lump sum and that tax is deducted from your salary and wages, but not from your reimbursements. However, this information does not change the character of the reimbursements and they are still private or domestic in nature.
While we acknowledge that the legal action that you have taken may have other indirect consequences including the restoration of other benefits, this does not negate the fact that you have incurred the legal expenses specifically to have your entitlements to medical and homecare reimbursements reinstated, and these expenses are considered private or domestic in nature.
Accordingly, you are not entitled to a deduction for the legal expenses that you have incurred in the restoration of these entitlements under section 8-1 of the ITAA 1997 as they are private or domestic in nature.