Private ruling: Legal expenses
Date of advice: 22 July 2017
Published: November 2017
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you entitled to a deduction for legal expenses incurred in seeking to recover unpaid workers compensation payments? | A1: Yes.

Relevant facts and circumstances: You suffered a work place injury and made a workers compensation claim against your employer. You were receiving weekly compensation payments until the insurer stopped making payments. You took legal action to recover the weekly compensation payments. You incurred legal expenses in undertaking the legal 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. 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 ( Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 3 AITR 436; (1946) 8 ATD 190). The nature or character of the legal expenses follows the advantage which 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. The legal expenses incurred by you were to recover unpaid weekly compensation payments that are loss of earnings and is therefore revenue in nature and not a capital receipt. There is a clear connection between your assessable income and the expense. Accordingly, the legal expenses were incurred in gaining your assessable income and are deductible under section 8-1 of the ITAA 1997.