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Edited version of your private ruling
Authorisation Number: 1012074887753
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Ruling
Subject: legal expenses
Question
Are you entitled to claim a deduction for legal expenses?
Answer: Yes
This ruling applies for the following period
Year ended 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
You were injured in the workplace and claimed workers compensation.
You sought legal assistance and incurred legal expenses.
The taxpayer was successful in their claim and received an assessable compensation payment for lost earnings.
Workcover paid you amounts throughput the year as compensation for income maintenance and arrears of income maintenance.
Workcover also made a contribution towards the overall legal costs you incurred in obtaining the Workcover payments however you personally incurred legal expenses as well.
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.
The courts have considered the meaning of 'incurred in gaining or producing assessable income'. In Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 56 ALR 785; (1949) 8 ATD 431 the High Court stated that:
For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing assessable it must be incidental and relevant to that end. The words "incurred in gaining or producing the assessable income" mean in the course of gaining or producing such income.
In determining whether a deduction for legal expenses is allowable under section 8-1 of the ITAA 1997, 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 the legal expenses follows the advantage which is sought to be gained by incurring the expenses.
Therefore to determine whether you are entitled to a deduction for legal expenses incurred, it is first necessary to determine whether the advantage sought is included in assessable income.
Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. It does not operate to include in a taxpayer's assessable income amounts of a capital nature.
The WorkCover payments you received for income maintenance and income maintenance in arrears take the character of that which they replace. That is, as the payments replace income amounts, they are also considered to be income.
Paragraph 42 of Taxation Ruling TR 98/1 states that salary and wages or other employment remuneration is assessable on receipts basis. This is irrespective of whether that income relates to a past or future income period.
Therefore, the arrears of WorkCover payments for loss of wages you received is assessable in the year it was received.
The legal expenses incurred by you in order to obtain the WorkCover payment resulted in you gaining assessable income. Therefore there is a clear connection between the assessable income and the expense. Therefore, you are entitled to a deduction for the legal expenses incurred in obtaining this payment.