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Ruling
Subject: Deductibility of legal expenses
Question and answer:
Are you entitled to a deduction of for legal expenses you incurred in the financial year 1 July 2009 to 30 June 2010?
Yes.
This ruling applies for the following period:
1 July 2009 to 30 June 2010.
The scheme commenced on:
1 July 2009.
Relevant facts and circumstances:
You engaged a solicitor to secure assessable income in the form of weekly payments under a Workcover claim.
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.
For legal expenses to constitute an allowable deduction under section 8-1 of the ITAA 1997, it must be shown that the expenses were incidental or relevant to the production of your assessable income (Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431).
In determining whether a legal expense is incidental or relevant to the production of your assessable income, the nature of the expenditure must be considered (Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 3 AITR 436; (1946) 8 ATD 190). The nature or character of expense will be determined by the advantage that is sought to be gained by incurring the expense.
If the advantage to be gained from the legal expense is revenue in nature (assessable income for example) then the expense will also be revenue in nature and will be deductible under section 8-1 of the ITAA 1997.
You incurred legal fees to secure weekly payments through a Workcover claim.
Because the weekly payments were part of your assessable income, those payments are revenue in nature. It follows that the legal fees you incurred to secure those payments are also revenue in nature.
The fact that you had to engage a solicitor to secure those weekly payments establishes that the expenses were incidental and relevant to the production of your assessable income.
Conclusion
You are entitled to a deduction for legal fees you incurred in securing assessable weekly payments through your Workcover claim.