Edited version of private advice

Authorisation Number: 1051521587990

Date of advice: 12 June 2019

Ruling

Subject: Legal Expenses

Legal expenses for compensation payment

Questions:

Are you entitled to claim a deduction for your legal expenses?

Answer:

No.

This ruling applies for the following period

Year ended 30 June 2018

The scheme commenced on

1 July 2017

Relevant facts

You submitted a Worker's Compensation claim against your employer.

When the claim was not accepted, you retained the services of a solicitor, and the claim was settled out of court, conditional on you resigning due to medical reasons.

You received an undissected lump sum settlement.

Paragraph 5 of the deed of agreement states that the agreement does not exclude or limit your rights under the Return to Work Act in connection with your injury and mentions sections 78A, 78B, and 186A of the Act.

You incurred legal expenses in pursuing final settlement of your claim.

Assumptions

None

Relevant legislative provisions

Income Tax Assessment Act 1997 - section 8-1

Income Tax Assessment Act 1997 - section 6-5

Reasons for decision

Summary

The legal expenses you have incurred are considered to be of a capital nature and are not deductible.

Detailed reasoning

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.

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. Dixon J stated at CLR 647 that:

...legal expenses...take the quality of an outgoing of a capital nature or of an outgoing on account of revenue from the cause or purposes of incurring the expenditure. We are, therefore, remitted to a consideration of the object in view when the legal proceedings were undertaken, or of the situation which impelled the taxpayer to undertake them.

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.

In your case, you have incurred legal expenses to receive a lump sum compensation payment in respect of your workers compensation personal injuries claim. The lump sum compensation payment in respect of your personal injuries claim was 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.

As the nature or character of legal expenses follows the advantage that is sought to be gained by incurring the expenses, the expenses you have incurred are considered to be of a capital nature and are not deductible.