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Ruling

Subject: legal expenses

Question

Are you entitled to a deduction for legal expenses incurred in obtaining a compensation payment?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

I July 2010

Relevant facts and circumstances

You suffered a workplace injury.

The injury forced you to take time off work to recover utilising your salary, personal and recreation leave and long service leave.

You filed a case for compensation for the injury.

You were denied your claim and you took legal action.

You were required to seek legal assistance and incurred legal expenses to recover lost income and entitlements.

The respondent accepted liability for the injury.

The appeal decision included the following:

· repayment of salary loss

· return of all entitlements in full such as personal leave, recreation leave and long service leave used for your recovery.

· pay costs and disbursements including Counsel fees as agreed.

You have provided a copy of the Statement of Account showing legal expenses incurred.

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 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, or relate to the earning of exempt income.

Generally, legal expenses have been held to be deductible if the expenses are directly related to the earning of income. 

In Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 3 AITR 436; (1946) 8 ATD 190, the Court established that in determining whether a deduction is allowable under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered. The nature or character of the legal expenses follows the advantage which is sought to be gained by incurring the expenses.

If the advantage to be gained is of a capital nature then the expenses incurred in gaining the advantage will also be of a capital nature.

Taxation Determination TD 93/29 discusses the deductibility of legal expenses incurred in recovering an amount for wages and states that if legal action goes beyond a claim for a revenue item such as wages, and constitutes an action for breach of the contract of employment, the legal costs would not be deductible because they are capital in nature.

In your case, you had lodged a claim for compensation in respect of an injury which was rejected. You sought legal action and were successful. You received a lump sum payment to recover lost salary and return of all of your entitlements.

You incurred legal expenses which related to items of revenue. You were not pursuing any other amounts which were of a capital nature. Therefore, legal expenses incurred in pursuit of your entitlements are deductible under section 8-1 of the ITAA 1997 in the year you incurred them.