Edited version of your private ruling

Authorisation Number: 1012511048407

Ruling

Subject: Legal expenses and self-education expenses

Question 1

Are you entitled to a deduction for legal expenses incurred in obtaining your income protection benefits?

Answer

Yes

Question 2

Are you entitled to a deduction for self-education expenses?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commences on:

1 July 2010

Relevant facts and circumstances

Legal expenses

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to read with this description. The relevant documents are:

· The application for private ruling

· Copy of Complaint Determination report

· Copy of Group Salary Continuance Policy

· Lawyers invoices and listing of work undertaken

· Professional services invoices

You took out a group salary continuance policy for income protection.

The policy insurance cover is benefits for disability, interim disability accident, proportionate benefits, rehabilitation expenses and bereavement, bed confinement, superannuation or increasing benefit option for a member.

You suffered a disability under the policy and made a claim

You were paid benefits for loss of wages.

You ceased employment and exercised a continuation option under the policy in your name pending obtaining employment within an agreed period of time. You later gained employment. The continuation option of the policy was accepted

You were later in and out of employment until when you suffered a recurrence of your previous injury and resigned from your employment. You continued to receive worker's compensation payments.

You lodged a further claim for income protection benefits.

Your claim was declined by your insurer based of your fitness for employment.

You later sought legal advice and lodged a complaint with the Ombudsman.

You incurred legal fees to recover your benefits.

The Ombudsman found that you were entitled to claim benefits under the Group Policy when you first left your employment as that the insurer's liability under that policy did not cease when you left your employment.

The Ombudsman ordered the insurer to proceed with your claim under the Group Policy from the date you left your employment.

Self- Education

You were first employed in a particular field of activity.

You resigned from your position due to a recurrence of a work disability.

You studied a Masters degree at the university.

At the time of your studies you were receiving workers compensation payments and following up on your salary continuance claim.

You provided a list of the subjects undertaken.

You have undertaken the course in order to improve your skills and knowledge

You have incurred course fees and travel expenses as you were required to travel interstate to undertake research.

The course fees were paid through FEE-HELP and travel costs were paid by you.

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.

Legal expenses

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 incurred legal expenses in order to obtain assessable benefits under the group salary continuance policy for income protection which was to replace lost earnings. The payments are revenue in nature and not a capital receipt and there is a clear connection between the assessable income and the expense.

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.

Self-education expenses

Taxation Ruling TR 98/9 discusses the circumstances under which self-education expenses are allowable as a deduction. Self-education expenses are deductible where they have a relevant connection to the taxpayer's current income earning activities.

A deduction is allowable for self-education expenses if a taxpayer's current income earning activities are based on the exercise of a skill or some specific knowledge and the subject of the self-education enables the taxpayer to maintain or improve that skill or knowledge (Federal Commissioner of Taxation v. Finn (1961) 106 CLR 60; (1961) 12 ATD 348; (1961) 8 AITR 406).

Similarly, if the study of a subject of self-education objectively leads to, or is likely to lead to an increase in a taxpayer income from his or her current income earning activities in the future, a deduction is allowable.

However, no deduction is allowable for self-education expenses if the study is designed to enable a taxpayer to open up a new income earning activity, whether in business or in the taxpayers current employment. Such expenses of self-education are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income (FC of T v. Maddalena (1971) 45 ALJR 426; (1971) 2 ATR 541; 71 ATC 4161).

In your case, at the time you undertook your studies you were unemployed. Therefore, at that time, your studies were not undertaken to maintain or improve an existing skill or knowledge used in your 'current' income-earning activities. Nor can it be said that the subject of your studies 'objectively led to, or was likely to lead to' a future increase in income from your 'current' income-earning activities.

The principle in Maddalena above applies. That is, the expenses associated with your studies are considered to have been incurred at a point too soon to be regarded as incurred in gaining or producing assessable income. Thus, you are unable to claim self education expenses under section 8-1 of the ITAA 1997.