Private ruling: Timing of income and expenses
Published: March 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the compensation payment assessable in the 2014 income year? | A1: Yes. | Q2: Are the legal expenses deductible in the 2014 income year? | A2: Yes.

Relevant facts and circumstances: You were injured at work and were refused compensation. You received a payment during the 2014 income year as a compensation payment for the loss of income. A payment summary was issued for the full amount to be declared in the 2014 income year. You incurred legal expenses to obtain the payment. You were invoiced for the legal expenses during the 2014 income year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(2) | Income Tax Assessment Act 1997 Section 8-1

Reasons for decision: Detailed Reasoning - Compensation payment: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Salary and wages income is regarded as ordinary income. Similarly, compensation payments that replace salary and wages and similar payments are also regarded as ordinary income and therefore assessable under subsection 6-5(2) of the ITAA 1997. Taxation Ruling TR 98/1 sets out the Commissioner's policy on the derivation of income. Paragraph 42 of TR 98/1 states that income from employment would normally be assessable on a receipts basis. Salary, wages or other employment remuneration are assessable on receipt even though they relate to a past or future income period. Similarly compensation payments paid to an individual are also considered to be derived when the payment is received (see paragraph 2 of Taxation Ruling IT 2107). In your case, you received the payment in the 2014 income year. As you received the income in the 2014, this amount is assessable in that year. | Detailed Reasoning - Legal expenses: Section 8-1 of the 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. You incurred legal expenses while pursuing income benefits under a policy which forms part of your assessable income. Thus, there is a clear connection between the assessable income and the expense and the legal expenses are deductible. Taxation Ruling TR 97/7 sets out general rules to assist in defining whether and when a loss or outgoing has been incurred for the purposes of section 8-1 of the ITAA 1997. Broadly, an expense is incurred at the time that a present money debt is owed and cannot be escaped. Importantly, a taxpayer need not have actually paid any money to have incurred such an outgoing, providing they are definitively committed to it in the year of income. That is, an expense may be incurred where there is a presently existing liability to pay a pecuniary sum (paragraph 6(a) TR 97/7) In your case you have received an invoice for your legal expenses in the 2014 income year. As the invoice is the basis of you incurring the expense, a deduction relating to the legal expenses can be claimed in the 2014 income year.