Private ruling: Legal expenses
Published: February 2014
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a deduction for legal expenses incurred when taking legal action to recover payments due under an income protection policy? | A1: Yes.

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 hold an income protection policy. The policy provides for the payment of an income replacement benefit where you are not capable of earning your normal income due to injury or illness. Waiting periods exist before any benefit can be paid. You made a claim under the policy seeking payment of a monthly income replacement benefit. The insurer rejected the claim. You are taking legal action against the insurer to have the claim approved and payments made in accordance with the policy. These payments will be ordinary income. You will incur legal expenses in relation to the action.

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 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 or a provision of the taxation legislation excludes it. For legal expenses to be deductible under section 8-1 of the ITAA 1997, they must have a relevant connection to the production of assessable income. Also, in determining whether a deduction is allowable the nature of the expenditure must also be considered. It is not a requirement that the legal action be successful for the associated legal expenses to be deductible. Legal expenses take the nature of an outgoing of a capital nature or an outgoing on account of revenue from the cause or purpose of incurring the expenditure ( Hallstroms Pty Ltd v. FC of T (1946) 72 CLR 634; 8 ATD 190). You are incurring legal expenses with the aim of receiving payments under an income protection insurance policy. If successful, any payments you receive from the insurer would be assessable as ordinary income. This is the case even if you received a lump sum payment for representing a back payment of monthly benefits. Therefore, your legal expenses have a relevant connection to the production of your assessable income. In addition, the advantage being sought is the payment of an amount on revenue account. As such, the character of your expenditure is also of a revenue nature. Accordingly, you will be entitled to a deduction under section 8-1 of the ITAA 1997 for legal expenses you incur in relation to seeking monthly income replacement benefits. The legal expenses are deductible in the year in which they are incurred.