Edited version of your written advice

Authorisation Number: 1012994500962

Date of advice: 7 April 2016

Ruling

Subject: Lump sum payment and legal fees

Question 1

Is the lump sum payment received assessable as ordinary income in the year of receipt?

Answer

Yes

Question 2

Are the legal expenses deductible in the year they are incurred?

Answer

Yes.

This ruling applies for the following period(s)

Year ended 30 June 2014

The scheme commences on

1 July 2013

Relevant facts and circumstances

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 be read with this description. The relevant documents are:

• the application for private ruling,

• copy of the Deed of Settlement and Release,

• copy of statement of account invoice issued by your Solicitor,

• further written information.

You entered into an income protection policy.

Several years later you ceased work due to illness.

In June 20xx you submitted a claim to your insurance company seeking payment of a monthly benefit, your insurer declined the claim.

Court proceedings commenced and it was concluded that your insurance company was to pay you a lump sum inclusive of damages, legal costs and interest.

The deed further states that you were to receive a monthly benefit of for a brief period.

Assumption(s)

None

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Section 8-1

Further issues for you to consider

N/A

Anti-avoidance rules

N/A

Reasons for decision

Compensation payment

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Salary and wages income is regarded as ordinary income. Similarly, compensation payments that replace salary and wages and similar payments are also regarded as ordinary income and therefore assessable under subsection 6-5(2) of the ITAA 1997.

Taxation Ruling TR 98/1 sets out the Commissioner's policy on the derivation of income. Paragraph 42 of TR 98/1 states that income from employment would normally be assessable on a receipts basis. Salary, wages or other employment remuneration are assessable on receipt even though they relate to a past or future income period. Similarly compensation payments paid to an individual are also considered to be derived when the payment is received (see paragraph 2 of Taxation Ruling IT 2107).

In your case, you received the payment in the 20xx-xx income year. As you received the income in the 20xx-xx income year, this amount is assessable in that year.

Legal expenses

Section 8-1 of the 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.

You incurred legal expenses while pursuing income benefits under a policy which forms part of your assessable income. Thus, there is a clear connection between the assessable income and the expense and the legal expenses are deductible.

Taxation Ruling TR 97/7 sets out general rules to assist in defining whether and when a loss or outgoing has been incurred for the purposes of section 8-1 of the ITAA 1997.

An expense is incurred at the time that a present money debt is owed and cannot be escaped. Importantly, a taxpayer need not have actually paid any money to have incurred such an outgoing, providing they are definitively committed to it in the year of income. That is, an expense may be incurred where there is a presently existing liability to pay a pecuniary sum (paragraph 6(a) TR 97/7)

In your case you have received an invoice for your legal expenses in the 20xx-xx income year.

As the invoice is the basis of you incurring the expense, a deduction relating to the legal expenses can be claimed in the 20xx-xxincome year.