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Edited version of your written advice
Authorisation Number: 1012847907746
Date of advice: 28 July 2015
Ruling
Subject: Legal expenses
Question
Are you entitled to a deduction for your legal expenses?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You are an employee.
Incidents occurred in relation to your work and you went on leave.
You sought WorkCover but were denied.
You sought legal assistance and incurred legal fees.
You will receive income replacement payments.
Your legal action was successful and you received payments based on a percentage of your previous weekly earnings.
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.
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.
The legal expenses incurred by you in relation to your WorkCover claim resulted in you gaining assessable income. Thus, there is a clear connection between the assessable income and the expense. Therefore, your legal expenses are deductible under section 8-1 of the ITAA 1997.
Please note that if you are indemnified (that is, you are compensated or reimbursed) for any amount of your deductible legal expenses then this amount is included in your assessable income under subsection 20-20(1) of the ITAA 1997. This counteracts the effect of a deduction for the amount of legal expenses you are not out of pocket for. That is, this ensures that you do not receive a tax benefit for any legal expenses for which you are not out of pocket for.