ATO ID 2002/193: Legal Expenses incurred in gaining compensation for loss of salary and wage income
Date of decision: 01 February 2002
Year of income: Year ended 30 June 2001
Business line: Small Business/Individual Taxpayers

Issue
Are the legal expenses incurred in obtaining a Total and Permanent Disability benefit for loss of salary and wage income an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. The legal expenses incurred in obtaining a Total and Permanent Disability benefit for loss of salary and wage income are an allowable deduction under section 8-1 of the ITAA 1997.

Facts
The taxpayer received a lump sum payment in respect of a Total and Permanent Disability benefit. The benefit was paid as compensation for the loss of salary and wage income, and not for the loss of income earning capacity. The benefit forms part of the taxpayer's taxable income in the year in which it is received. The taxpayer incurred legal expenses in obtaining this payment.

Reasons for decision
Summary: Section 8-1 of the ITAA 1997 states that you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing assessable income and is not: 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. The nature or character of the legal expenses follows the advantage which is sought to be gained by incurring the expenses. If the advantage to be gained is of a revenue nature, then the costs incurred in gaining the advantage will also be of a revenue nature. The legal expenses were incurred by the taxpayer in order to obtain compensation for the loss of salary and wage income, and not for the loss of income earning capacity. Thus, the advantage which the taxpayer sought in incurring the legal expenses was an advantage of a revenue rather than capital nature. Further, the legal expenses were not private or domestic in nature, were not incurred in gaining or producing exempt income or non-assessable non-exempt income, and were not an outgoing prohibited from being deductible by a section of the ITAA 1997 or the ITAA 1936. Therefore, the legal expenses are deductible under section 8-1 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1936 The Act
Case references: Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634 [1946] HCA 34
Related public rulings and determinations: TR 2012/8
Subject references: Compensation expenses Legal expenses