Private ruling: Deductibility of legal expenses
Published: February 2013
Ruling period: 1 July 2002 to 30 June 2004.
Date scheme commenced: 1 July 2002.

Ruling: Question and answer: | Are you entitled to a deduction for legal expenses incurred in pursuing workers compensation entitlements? | Yes.

Relevant facts and circumstances: You suffered a workplace injury. You took legal action to pursue a workers compensation claim. As a result of that legal action you received a lump sum payment, comprised of weekly income payable to you under the provisions of workers compensation legislation. You incurred and paid legal fees in pursuit of your workers compensation entitlements.

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

Reasons for decision: Summary: Broadly, 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 your assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. In determining whether a deduction for legal expenses is allowed under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered. The nature or character of the expense follows the advantage which is sought to be gained by incurring the expenses. The question of the deductibility of legal expenses under section 8-1 of the ITAA 1997 has been considered by the courts. In Romanin v. Commissioner of Taxation (2008) FCA 1532; 2008 ATC 20-055; (2008) 73 ATR 760 (Romanin's case) the taxpayer pursued proceedings to obtain income that was contractually owed to him. The requisite connection was found to exist between the taxpayer's legal expenses and the earning of the taxpayer's assessable income and the legal costs incurred in doing so were deductible under section 8-1 of the ITAA 1997. | Detailed Reasoning - Conclusion: We consider your circumstances to be similar to those in Romanin's case. You incurred legal expenses in pursuit of lost earnings in the form of weekly income that you were entitled to under the relevant workers compensation legislation. There is a direct connection between your legal expenses and the gaining or producing of your assessable income and the expenses are therefore deductible under the provisions of section 8-1 of the ITAA 1997. You are entitled to deduct the expenses in the financial years you incurred them.

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