Private ruling: Legal expenses
Published: August 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for legal expenses incurred during the 2011-12 financial year? | A1: Yes.

Relevant facts and circumstances: You had a medical emergency at work. You made a claim with an agency for monthly wage replacement payments. The claim was refused as it was not accepted that your medical emergency was caused by work related stress. You sought legal advice and took the agency to court. You were seeking monthly wage replacement payments. The proceedings took a considerable amount of time and your claim was initially rejected. You appealed this decision and were successful. You received back pay from the agency from when the medical emergency occurred. This amount will be included in your assessable income in the 2011-12 financial year. You incurred legal expenses in the 2011-2 financial year in relation to the court action. You currently receive monthly payments from the agency.

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

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. 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. 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. In your case, you incurred legal expenses in relation to recovering monthly wage replacement payments from the agency. The payments you sought were revenue amounts that will form part of your assessable income. Therefore, the advantage sought was not of a capital nature. You legal expenses are deductible as they were incurred in order to gain assessable income and they are not capital in nature.