Private ruling: Tax deduction for medical expenses incurred
Published: October 2011
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to a deduction for medical expenses incurred while in paid employment, and since your employment was terminated? | A1: No.

Relevant facts and circumstances: In the 2010-11 financial year you visited your general practitioner and was diagnosed with anxiety and depression (your condition) due to being the victim of work place bullying. You then informed your employer that you would be taking sick leave as a result of your condition. Your employer informed you that you could not return to work unless your general practitioner confirmed that you were well enough to do so. You have been attending a general practitioner on a regular basis, who referred you to a psychologist who specialises in treatment for victims of workplace bullying. Your employment was terminated. Since your employment was terminated your condition has not improved to enable you to begin seeking paid employment. You are currently receiving Centrelink benefits and are not required to seek paid employment because of your condition. However in order for you to continue to receive Centrelink benefits you must continue to be treated for your condition. As such you continue to incur medical expenses for your treatment. You submitted a workcover claim relating to your condition and the required treatment, but the insurer declined the application.

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

Reasons for decision: Summary: You are not entitled to a tax deduction in relation to medical expenses you incur for the treatment of your condition, as the expenses do not have a sufficient nexus to earning your assessable income. Furthermore, the expenses are inherently private in nature. | Detailed Reasoning - Detailed reasoning: Section 8-1 of the Income Tax Assessment Act 1997 (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. A number of significant court decisions have established that, for an expense to satisfy the requirements of section 8-1 of the ITAA 1997: it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income producing expense ( Lunney & Hayley v. Federal Commissioner of Taxation (1958) 100 CLR 478; (1958) 11 ATD 404; (1958) 7 AITR 166) 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. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236); 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 their assessable income ( Charles Moore & Co Pty Ltd v. Federal Commissioner of Taxation (1956) 95 CLR 344; (1956) 11 ATD 147; (1956) 6 AITR 379 and Federal Commissioner of Taxation v. Hatchett (1971) 125 CLR 494; 71 ATC 4184; (1971) 2 ATR 5570. Generally medical expenses have no direct connection to the gaining or producing of assessable income and relate to a personal medical condition. The deductibility for expenditure on medical appliances is addressed in Taxation Ruling IT 2217. Although you do not utilise a medical appliance in relation to your condition, the principles contained in the ruling are equally relevant in your case. Paragraph 3 discusses a United Kingdom case of Norman v. Golder (1945) Vol.1 All E.R. 352, where the Court of Appeal had to consider whether a professional shorthand writer was entitled to income tax deductions for medical expenses incurred due to illness caused by working in unfavourable conditions. The Court made the following observations: It is quite impossible to argue that a doctor's bills represent money wholly and exclusively laid out for the purposes of the trade, profession, employment or vocation of the patient. True it is that if you do not get yourself well and so incur expenses to doctors you cannot carry on your trade or profession, and if you do not carry on your trade or profession you will not earn an income, and if you do not earn an income the Revenue will not get any tax. The same thing applies to the food you eat and the clothes you wear. But expenses of that kind are not wholly and exclusively laid out for the purposes of the trade, profession or vocation. They are laid out in part for the advantage and benefit of the taxpayer as a living human being. Para (b) of the rule equally would exclude doctor's bills, because they are in my opinion, expenses of maintenance of the party, his family or a sum expended for a domestic or private purpose, distinct from the purpose of the trade or profession. Although Australian income tax law differs from that in the United Kingdom, the reasoning adopted by the Court of Appeal in the above quoted case is followed in Australia. Thus, in Lunney and Hayley v. FCT , the High Court held that the cost of travel to and from work was not an allowable income tax deduction. Similarly in Lodge v. F.C. of T . 72 ATC 4174, (1972) 3 ATR 254, the High Court held that child minding expenses were not an allowable income tax deduction. In both the cases the Court recognised that the expenditures were incurred for the purpose of earning assessable income, and were an essential prerequisite to the derivation of that income. However, the expenditures were not incurred in the actual gaining of the assessable income and, for that reason, did not qualify for income tax deduction. We consider that your circumstances are similar to those outlined in the cases referred to above. In your case you state the following: Your general practitioner diagnosed you with anxiety and depression which was due to you being the victim of work place bullying. As such you believe the medical expenses you incur for the treatment of your condition was directly related to your employment. As your employer advised that you could not return to work until your medical practitioner confirmed that you were well enough to do so, the medical expenses are incurred on direction of your employer and should be deductible. In order for you to continue to receive Centrelink benefits you must continue to be treated for your condition. Although you incur medical expenses due to an illness caused by unfavourable working conditions, and the expenses are incurred for the purpose of allowing you to return to work to derive an income, or to receive income from Centrelink, the expenses are not incurred in the course of gaining assessable income. They are incurred to enable you to overcome your condition and are private in nature. Therefore the medical expenses you incur in the treatment of your condition are not an allowable deduction under section 8-1 of the ITAA 1997.

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