Edited version of private advice

Authorisation Number: 1052311411511

Date of advice: 2 October 2024

Ruling

Subject: Deductions - medical expenses

Question

Are you entitled to a deduction for your out-of-pocket medical costs in relation to kidney stones?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

XX XXXX 20XX

Relevant facts and circumstances

You have been a commercial and airline pilot for about XX years.

As an airline transport pilot, you are required to maintain a class 1 medical status to have an Airline Transport Pilot License (ATPL).

On XX XXXX 20XX, you were admitted to hospital after suffering abdominal pain.

You undertook a CT scan, which confirmed you had renal calculi (kidney stones).

You were informed that the dimension of the stone was less than 5mm and that no intervention was required with stones less than 5mm, as they would pass through the urinary tract naturally.

You are required to pass a class 1 medical appointment to hold a valid ATPL.

On XX XXXX 20XX, you had a class 1 medical examination appointment with the Civil Aviation Safety Authority (CASA) designated aviation medical examiner (DAME). You advised the examiner of your kidney stones. Kidney stones is a condition listed on the CASA medical website and requires immediate grounding of the pilot. Due to your condition, you were unable to meet the standard requirement for a class 1 medical status. Without passing the class 1 medical your ATPL was not valid, and you were unable to conduct any form of flying.

To pass the class 1 medical and renew your ATPL, you were required to show evidence that the kidney stones had passed.

On XX XXXX 20XX, you had an appointment with a urologist to discuss potential options.

On XX XXXX 20XX, you undertook dissolution therapy for XX weeks. Your urologist concluded that the density of stone material not conducive to success.

On XX XXXX 20XX, the urologist advised you, that the only possible treatment was invasive.

On XX XXXX 20XX, you were admitted to hospital. Over a period of XX weeks, you undertook procedures to remove the calculi. Following this treatment the urologist was able to provide sufficient evidence to CASA medical that there were no remaining kidney stones.

You incurred a total of $X in out-of-pocket medical expenses in relation to your kidney stones and treatment.

On XX XXXX 20XX, your class 1 medical status was granted and your ATPL was renewed. You were able to continue your commercial flying.

You will be monitored by regular low dose CAT scans for the remainder of your career.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

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, or relate to the earning of exempt income.

The High Court majority in Commissioner of Taxation v Payne [2001] HCA 3 said it is well established that these words are to be understood as meaning incurred 'in the course of' gaining or producing assessable income, and do not convey the meaning of outgoings incurred 'in connection with' or 'for the purpose' of deriving assessable income.

The majority further stated that the meaning of 'in the course of' gaining or producing income was amplified in Ronpibon Tin NL v Commissioner of Taxation (Cth) [1949] HCA 15 where it was held that:

... to come within the initial part of [section 8-1] it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income, or if none be produced, would be expected to produce assessable income...

Taxation Ruling TR 2020/1 Income tax: employees: deductions for work expenses under section 8-1 of the Income Tax Assessment Act 1997 sets out when an employee can deduct a work expense under section 8-1 of the ITAA 1997. For the purposes of this Ruling, 'work expense' means 'a loss or outgoing you incur in producing your salary or wages'.

For the expense to be deductible it must be incurred in the course of gaining or producing assessable income. Paragraphs 16, 17, 22, 26, 27 and 31 of the TR 2020/1 state:

16. For expenses incurred by employees, the fundamental question is whether an expense is incurred in the course of earning employment income. This involves considering the proper scope of the particular taxpayer's work activities to determine if the circumstances of the expense have a sufficiently close connection to earning the employment income.

17. This means that an expense deductible for a taxpayer in one job is not necessarily deductible for another taxpayer holding a similar job. Variations in employment duties may have a significant bearing on the extent of connection between an expense item and the earning of income, which could explain differences in deductibility outcomes.

22. The requirement that expenses be incurred in the course of producing assessable income means that it is not enough to show only that there is some general link or causal connection between expenditure and the production of income. The expenditure must have a sufficiently close connection to performance of the employment duties and activities through which the employee earns income.

26. A common issue relating to the deductibility of employee expenses is the relevance of express or implied conditions of employment. In this regard, a question that frequently arises is whether an expense becomes deductible merely because an employer specifically requires the employee to incur the expense.

27. In these circumstances, the employer's requirements do not determine the question of deductibility. This question is always to be answered by reference to the statutory test which involves an objective determination of the connection between the expense and the employee's income-earning activities.

31. Although an employer's requirements do not determine deductibility, they are not irrelevant and, in particular, will generally assist in ascertaining the proper scope of an employee's income-earning activities to determine whether an expense has been incurred in the course of earning assessable income. Furthermore, the fact that an employee incurs an expense on a voluntary basis (that is, not at the direction of their employer) does not necessarily preclude a deduction under section 8-1).

A deduction cannot be claimed if it is for private or domestic purposes. Paragraph 47 of TR 2020/1 states:

47. Although the separate presence of a private test within section 8-1 implies that expenditure of this nature could otherwise qualify as a deduction under the positive test, it has been observed that it is a 'rare case where an outgoing incurred in gaining assessable income is also an outgoing of a private nature'. Characterisation of an expense as private typically supports a conclusion that the expense does not have a sufficiently close connection to the earning of assessable income by the employee.

Generally medical expenses have no direct connection to the gaining or producing of assessable income and relate to a personal medical condition. Medical expenses are usually a prerequisite to the earning of assessable income. There is typically insufficient connection to the gaining or production of assessable income for a deduction to be allowed. This is the case even though a taxpayer may, as a matter of practicality, need to incur the expenditure to earn assessable income.

It is a long-standing principle that a taxpayer does not satisfy section 8-1 of the ITAA 1997 merely by demonstrating some causal connection between the expenditure and the derivation of income. What must be shown is a closer and more immediate connection. The expenditure must be incurred 'in the course of' gaining or producing the assessable income (Lunney v. Commissioner of Taxation, Hayley v. FC of T (1958) 100 CLR 478; [1958] HCA 5; (1958) 11 ATD 404; (1958) 7 AITR 166). These principles have been affirmed by the High Court in Commissioner of Taxation v. Payne (2001) 202 CLR 93; [2001] HCA 3; 2001 ATC 4027; (2001) 46 ATR 188.

Taxation Ruling TR 95/19 Income tax: airline industry employees - allowances, reimbursements and work-related deduction applies to employees in the airline industry ('airline employees'). For the purposes of this Ruling, airline employees are flight attendants, flight engineers, pilots and ground engineers.

Paragraph 23 of TR 95/19 lists common work-related expenses incurred by airline employees and the extent to which they are allowable deductions. Included in this list is medical examinations for licence renewal. TR 95/19 states that a deduction is allowable for the expenses associated with medical examinations for the renewal of relevant licences. These expenses include the cost of the travel to and from the medical practitioner.

Application to your circumstances

At the time you suffered the renal calculi (kidney stones), you were employed as an airline transport pilot holding an Airline Transport Pilot License (ATPL). A requirement of this license is to maintain a class 1 medical status. Kidney stones is a condition listed on the CASA medical website and requires immediate grounding of a pilot. Due to the kidney stones, you were unable to meet the standard requirement for a class 1 medical status. You incurred out of pocket expenses of $X in removing the kidney stones. After they were removed you were able pass the class 1 medical examination and renew your ATPL.

The costs associated with the class 1 medical examination are deductible as stated in paragraph 23 of TR 95/19. However, TR 95/19 does not list a deduction for the medical expenses related to the removal of kidney stones or other treatments. The amount you are claiming of $X does not relate to the medical examination. Therefore, it needs to be determined if the expenses are incurred in gaining or producing assessable income or if the expenses are private under section 8-1 of the ITAA 1997. You incurred out of pocket expense of $X relating to the treatment of kidney stones. Medical expenses for treatment and rehabilitation have a private character, even if they are a requirement for receiving assessable income. Subsection 8-1(2) of the ITAA 1997 states that you cannot deduct a loss or outgoing if it is of a private or domestic nature. Your medical expenses are private in nature and are not deductible.