Private ruling: Legal expenses
Published: October 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for legal expenses to obtain salary and wages? | A1: Yes. | Q2: Are you entitled to a deduction for legal expenses to obtain an impairment payment? | A2: No. | Q3: Are you entitled to a deduction for legal expenses to obtain damages? | A3: No.



Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for a loss or an outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature. A number of significant court decisions have determined that for an expense to be an allowable deduction: · it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense ( Lunney v. FC of T ; (1958) 100 CLR 478), · there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income ( Ronpibon Tin NL v. FC of T , (1949) 78 CLR 47), and · it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income ( Charles Moore Co (WA) Pty Ltd v. FC of T , (1956) 95 CLR 344; FC of T v. Hatchett , 71 ATC 4184). For legal expenses to constitute an allowable deduction, it must be shown that they are incidental or relevant to the production of the taxpayer's assessable income or business operations. Also, in determining whether a deduction for legal expenses is allowable 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) 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. | Detailed Reasoning - Lump sum salary and wages: Income from salary and wages is assessable income. Therefore, legal expenses relation to obtaining salary and wages owed to you are deductible. | Detailed Reasoning - Payment for impairment and damages: Payments made to you for impairment and damages are not assessable to you as they are considered to be capital in nature. Therefore, as discussed above, legal expenses relating to obtaining these payments are not deductible.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: As the result of a workplace injury, you incurred the following legal expenses: | to obtain a lump sum salary and wages; | to obtain a payment for impairment; | to obtain a damages payment. | Relevant legislative provisions | Income Tax Assessment Act 1997 Section 8-1