ATO Interpretative Decision

ATO ID 2002/674

Deductions and Expenses

Legal Expenses - personal injury damages award
FOI status: may be released
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Status of this decision: Decision Current
CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

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If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Is the taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for legal expenses incurred in obtaining a personal injury damages award?

Decision

No. The taxpayer is not entitled to a deduction under section 8-1 of the ITAA 1997 for legal expenses incurred in obtaining a personal injury damages award.

Facts

The taxpayer took their employer to court to recover damages for an injury suffered by the taxpayer that occurred at work.

The taxpayer wanted recognition from their employer that the injury was work related and also sought monetary compensation for injury suffered.

The taxpayer obtained a personal injury damages award.

The taxpayer incurred legal expenses in relation to this matter.

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.

In determining whether a deduction for legal expenses is allowed 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] HCA 34; (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.

An amount paid to compensate for loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; [1952] HCA 65; (1952) 5 AITR 443; (1952) 10 ATD 82). Lump sum damages awarded at common law for a personal injury claim generally do not form part of a taxpayer's assessable income (ATO ID 2004/943).

The personal injury damage award received by the taxpayer is capital in nature and does not form part of the taxpayer's assessable income. The legal expenses incurred in obtaining the payment will consequently be capital in nature as they follow the advantage that is sought to be gained by incurring the expenses. Accordingly, no deduction is allowable under section 8-1 of the ITAA 1997 to the taxpayer for the legal expenses incurred in obtaining the personal injury damages award.

Amendment History

Date of Amendment Part Comment
2 April 2015 Reasons for Decision Amend for clarity and style
Include medium neutral citations
Case References Include medium neutral citations

Date of decision:  22 January 2002

Year of income:  Year ended 30 June 2001

Legislative References:
Income Tax Assessment Act 1997
   section 8-1

Case References:
Hallstroms Pty Ltd v. Federal Commissioner of Taxation
   (1946) 72 CLR 634
   [1946] HCA 34
   (1946) 3 AITR 436
   (1946) 8 ATD 190

Federal Commissioner of Taxation v. Dixon
   (1952) 86 CLR 540
   [1952] HCA 65
   (1952) 5 AITR 443
   (1952) 10 ATD 82

Related ATO Interpretative Decisions
ATO ID 2004/943

Keywords
Deductions & expenses
Legal action
Legal expenses
Personal injury awards

Siebel/TDMS Reference Number:  1-6CUQQM6 / DW372567

Business Line:  Small Business/Individual Taxpayers

Date of publication:  28 June 2002

ISSN: 1445-2782

history
  Date: Version:
  22 January 2002 Original statement
You are here 2 April 2015 Updated statement