Private ruling: Medical expense tax offset
Published: June 2014
Ruling period: Year ended 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 July 2012

Ruling: Q1: Do your medical expenses qualify as a business deduction? | A1: No. | Q2: Do your medical expenses qualify as eligible medical for the purposes of the medical expenses tax offset? | A2: Yes. | Q3: Does the cost of your private health insurance premiums qualify as eligible medical for the purposes of the medical expenses tax offset? | A3: No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You are a sub contractor. You injured your knee at work in the 2011-12 financial year. You required surgery in the 2012-13 financial year. You have incurred costs for physio, doctors' fees and for private health insurance.

Relevant legislative provisions: Income Tax Assessment Act 1936 Subsection 159P(1). | Income Tax Assessment Act 1936 S ubsection 159P(4). | Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision: Summary: As your medical expenses have no direct connection to the gaining or producing of your assessable income, you are not entitled to a deduction. However, medical costs paid to a doctor and physio are eligible to be included in your net medical expense tax offset. | Detailed Reasoning - Detailed reasoning: Section 8-1 of the Income Tax Assessment Act 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. Generally medical expenses have no direct connection to the gaining or producing of assessable income as the purpose of the expense is to return you to health. The expense relates to a personal medical condition and is private in nature. There is insufficient connection to the gaining or production of assessable income for a deduction to be allowed as the expenditure is too remote. In Mansfield v. FC of T 96 ATC 4001; (1995) 31 ATR 367 the Federal Court of Australia decided that expenses of a private or personal nature may be an allowable deduction where the working environment is sufficiently abnormal and unique as to make the essential character of the expenditure work-related rather than private in nature. However, whether such an expense is either private or work related involves questions of fact and degree, and something out of the ordinary is usually necessary for the essential character of the expenditure to be seen as work related (Taxation Ruling TR 96/17). In your case, you work as a sub contractor. Your working environment is not sufficiently abnormal and unique to alter your medical expenses from a private expense to a business deduction. A medical expenses tax offset is available under subsection 159P(1) of the Income Tax Assessment Act 1936 (ITAA 1936) where the taxpayer pays eligible medical expenses in an income year for themselves or a dependant who is an Australian resident. The medical expenses tax offset is only available if the amount of medical expenses, after being reduced by any entitlement to reimbursement from a health fund or government authority such as Medicare, exceeds the threshold amount. The amount of net medical expenses tax offset you can claim will now depend on your level of income. You will be able to claim an offset of 10% of your net medical expenses over $5,000 if you have an adjusted taxable income (ATI) above: • $84,000 if you are single, or • $168,000 if you are a couple or family The family threshold will increase by $1,500 for each dependent child after the first. If your ATI is below these income thresholds, you are not affected by this change and can continue to claim an offset of 20% of your net medical expenses over the relevant threshold amount. For the 2012-13 financial year the threshold amount is $2,120. Please note that the threshold amount is subject to indexation and will change in future income years. Medical expenses are defined in subsection 159P(4) of the ITAA 1936 to include: • payments to a legally qualified medical practitioner, nurse or chemist, or a public or private hospital, in respect of an illness or operation and also; • payments for therapeutic treatments administered by direction of a legally qualified medical practitioner. The out of pocket expenses you have paid qualifies as an eligible medical expense for the purposes of the medical expenses tax offset and you are entitled to include the unreimbursed cost in your calculation of the medical expenses tax offset. However, your private health insurance premiums are not paid to a legally qualified medical practitioner, to a hospital or for therapeutic treatments at the direction of a legally qualified medical practitioner and therefore cannot be included. | Detailed Reasoning - Further information: It should be noted that the net medical expenses tax offset (NMETO) is being phased out between the 2013-14 and 2018-19 financial years. Transitional arrangements will allow taxpayers to claim the offset from the 2013-14 financial year until the end of the 2018-19 financial year, but only for those medical expenses relating to disability aids, attendant care or aged care. In addition, for the 2013-14 financial year and 2014-15 financial year, taxpayers will be eligible to claim the full range of medical expenses (as defined currently) but only if they have received an amount of the net medical expenses tax offset in the previous financial year (or in both 2012-13 and 2013-14 in respect to claims in the 2014-15 financial year).