Private ruling: Legal expenses
Date of advice: 13 October 2015
Published: November 2015
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 when taking legal action to recover payments due under an income protection policy? | A1: Yes.

Relevant facts and circumstances: You received a lump sum payment. The lump sum amount is back pay for previous years from your income protection insurance policy. You hired lawyers to prove your disability and incurred legal fees. You have received a PAYG payment summary showing the lump sum amount as assessable income and an amount of tax withheld.

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 person to claim a loss or outgoing that is incurred in gaining or producing assessable income so long as the loss or outgoing is not of a capital, private or domestic nature. 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: 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 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 order to obtain the income protection insurance payments resulting in you gaining assessable income. Thus, there is a clear connection between the assessable income and the legal expenses incurred. Accordingly, you are entitled to a deduction for the legal expenses incurred under section 8-1 of the ITAA 1997.