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Ruling

Subject: Medicare levy surcharge

Question 1

Are you entitled to a Medicare levy surcharge tax offset?

Answer:

Yes.

Question 2

Are you entitled to a deduction for your 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

Several years ago you sustained a work injury and required medical attention. This was covered by Work Cover.

Your injury was so bad you needed to stop working.

Because of your injury you have not been able to return to work and have gone through many years of treatment.

During this time you were receiving Centrelink benefits.

In the relevant year, after a long struggle, your solicitor fought on your behalf and you were paid compensation.

You received compensation that related to previous years.

Your taxable income is over $154,000.

You incurred legal expenses.

A Medicare levy surcharge was imposed.

Relevant legislative provisions

Medicare Levy Act 1986 Sections 8B to 8G.

Income Tax Assessment Act 1997 Section 61-580

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Medicare levy surcharge

Taxpayers without adequate private patient hospital cover through health insurance are liable to pay an additional 1% Medicare levy surcharge if their income for Medicare levy surcharge purposes exceed the relevant threshold. For example, a taxpayer without private patient hospital cover who had a spouse during the income year will pay the Medicare levy surcharge if their income for surcharge purposes exceed $154,000 for the relevant income year.

The Medicare levy surcharge is imposed by sections 8B to 8G of the Medicare Levy Act 1986.

As your taxable income for the relevant income year was over $154,000, a Medicare levy surcharge was imposed.

However, section 61-580 of the Income Tax Assessment Act 1997 (ITAA 1997) may allow a Medicare levy surcharge lump sum in arrears tax offset if the Medicare levy surcharge was imposed because you received an eligible lump payment in arrears in the year of income.

Under section 61-580 of the ITAA 1997 you are entitled to a Medicare levy surcharge tax offset.

Legal expenses

Section 8-1 of the ITAA 1997 allows a deduction for a loss or an outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature.

For legal expenses to constitute an allowable deduction, it must be shown that they are incidental or relevant to the production of the taxpayer's assessable income.

Legal expenses incurred in recovering an amount of assessable income is generally considered to be of a revenue nature and therefore deductible under section 8-1 of the ITAA 1997.

Similarly, legal expenses incurred in recovering an amount of assessable compensation is also generally allowable as they directly relate to gaining or producing assessable income.

In your case you incurred legal expenses in relation to receiving your compensation payments. It is considered that the associated legal expenses in relation to your compensation related sufficiently to the earning of your assessable income and are therefore deductible under section 8-1 of the ITAA 1997.