Private ruling: Legal expenses
Date of advice: 7 September 2016
Published: October 2016
Ruling period: Yeah ending 30 June 2016.
Date scheme commenced: 1 July 2015.

Ruling: Q1: Are you entitled to claim a deduction for legal advice in reference to obtaining a WorkCover claim that was originally denied? | A1: Yes.

Relevant facts and circumstances: You are employed by a Government department. You experienced a workplace incident. You applied for WorkCover however this claim was denied. You used all of your own leave entitlements during this time off. You obtained legal representation to have your WorkCover claim overturned. The matter was settled in your favour. The Government department was advised to start paying your weekly WorkCover entitlements and all leave used was credited back to you. You did not apply for a lump sum compensation payment.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | 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 allowed, 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. Legal expenses are generally deductible if the legal action has a peripheral connection to the taxpayer's income producing activities ( Magna Alloys and Research Pty Ltd v. FC of T (1980) 49 FLR 183; (1980) 11 ATR 276; 80 ATC 4542). Therefore to determine whether you are entitled to a deduction for legal expenses incurred, it is first necessary to determine whether the advantage sought is included in assessable income. In your case, the WorkCover payments you receive for income maintenance takes the character of that which they replace. That is, as the payments replace income amounts, they are also considered to be assessable income. Therefore, the legal expenses incurred by you in order to obtain the WorkCover payments resulted in you gaining assessable income. Consequently there is a clear connection between the assessable income and the expenses. Therefore, you are entitled to a deduction for the legal expenses incurred in obtaining this income under section 8-1 of the ITAA 1997.