Private ruling: Legal fees
Date of advice: 4 October 2017
Published: January 2018
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Are you entitled to a deduction for legal expenses? | A1: Yes

Relevant facts and circumstances: You were injured at work in September 20XX and lodged a compensation claim with your employer. Your claim was accepted, but later in 20XX your case was closed, you were on restricted duties. You engaged a lawyer and lodged and appeal to the tribunal but you lost the appeal. Your lawyer found an error with the original AAT decision so you lodged and appeal to the Federal court. This appeal was successful and you were awarded a lump sum compensation payment. You have provided a deed of release and incurred legal fees.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1

Reasons for decision: Summary: Section 8-1 of the ITAA 1997 allows you a deduction for expenses that relate to your assessable income. However, if those expenses are private, domestic or capital in nature, or relate to income that is exempt from tax, such deductions are not allowed. 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. In Tax Determination TD 93/29 the Commissioner states that legal expenses incurred by an employee in recovering unpaid wages are deductible under section 8-1 of the ITAA 1997, as the expenses are directly incurred in the process of deriving assessable income. However, if legal action goes beyond a claim for a revenue item such as wages, the legal costs may not be deductible. In your case you incurred legal expenses in relation to continuing your worker’s compensation payments. As these payments represent a replacement of your salary and wages, they are considered to be revenue in nature and assessable. The associated legal expenses in relation to your unpaid worker’s compensation payments relates sufficiently to the earning of your assessable income and are therefore deductible under section 8-1 of the ITAA 1997. The rulings in the register have been edited and may not contain all the factual details relevant to each decision. Do not use the register to predict ATO policy or decisions.