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Edited version of your written advice
Authorisation Number: 1012773093593
Ruling
Subject: Legal expenses
Question 1
Are you entitled to a deduction for your legal expenses incurred in relation to your claim for worker's compensation payments?
Answer
Yes.
Question 2
Are you entitled to a deduction for your legal expenses incurred in relation to the assessable component of your invalidity retirement pension?
Answer
Yes.
Question 3
Are you entitled to a deduction for your legal expenses incurred in relation to the tax free component of your invalidity retirement pension?
Answer
No.
This ruling applies for the following periods
Year ended 30 June 2013
Year ended 30 June 2014
Year ended 30 June 2015
The scheme commenced on
1 July 2012
Relevant facts
You lodged a claim for worker's compensation.
You later ceased work permanently.
Your worker's compensation claim was accepted. After a while liability ceased.
After further investigations, the doctor supported a case that liability continues. Liability continued. You consulted a lawyer who assisted with the reconsideration process. You received continuous fortnightly income payments from worker's compensation for some time.
Worker's compensation then ceased liability due to further dispute over diagnosis. As you had doctors strongly supporting your claim for liability, you submitted reconsideration, which was unsuccessful. You then appealed.
When it came to the hearing dates, you were forced to withdraw your claim because you were no longer well enough to attend the hearing.
Since initially filing the appeal, you had suffered further.
You were encouraged to submit a claim for invalidity retirement payments. You consulted your lawyer for the invalidity retirement claim which was filed.
The invalidity retirement panel declared that you were totally and permanently incapacitated. You received a fortnightly pension.
At this stage you were forced to withdraw your worker's compensation claim to prevent further severe deterioration to your condition.
A component of your invalidity pension is tax free and the remainder is assessable.
You incurred legal expenses in relation to your worker's compensation claim and your invalidity retirement 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 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 or business operations. Also, 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 that 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. It follows also that the character of legal expenses is not determined by the success or failure of the legal action.
In Tax Determination TD 93/29 Income tax: if an employee incurs legal expenses recovering wages paid by a dishonoured cheque, are these legal expenses an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997? the Commissioner states that legal expenses incurred by an employee in recovering unpaid wages are deductible under section 8-1 of the ITAA 1997, as the expenses are directly incurred in the process of deriving assessable income. However, if legal action goes beyond a claim for a revenue item such as wages, the legal costs may not be deductible.
Legal expenses incurred in recovering salary or wages are considered to be of a revenue nature and therefore deductible under section 8-1 of the ITAA 1997.
In your case you incurred legal expenses in relation to continuing your fortnightly worker's compensation payments. As these payments represent a replacement of your salary and wages, they are considered to be revenue in nature and assessable. The associated legal expenses in relation to your claim for continuing worker's compensation payments relates sufficiently to the earning of your assessable income and are therefore deductible under section 8-1 of the ITAA 1997. The fact that the claim was unsuccessful does not change the deductible nature of the expenses.
As your invalidity pension is not fully assessable, you are only entitled to the portion of the legal expenses that relate to the assessable components. No deduction is allowed for legal expenses incurred relating to the tax free component.
You will therefore need to apportion the legal expenses incurred in relation to your invalidity retirement pension using a reasonable basis.