Private ruling: Deductibility of legal expenses
Date of advice: 19 November 2015
Published: January 2016
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Question and answer: | Are you entitled to a deduction for expenses that you have incurred relating to your legal proceedings? | No.

Relevant facts and circumstances: You were an employee. You had a work related injury. After the injury was incurred you received reimbursement of medical expenses from a government insurer. After a number of years, the insurer ceased liability and as a result from that point you received no further reimbursement for medical expenses A dispute then occurred that was eventually resolved in a court. The court primarily ruled in your favour and once again the insurer began reimbursing you for certain medical expenses. You incurred legal and other general expenses during this dispute.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1

Reasons for decision: Detailed Reasoning - Deductions: 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. However, you cannot deduct a loss or outgoing if it is capital, private or domestic in nature or incurred in relation to gaining or producing exempt income. Medical expenses are not deductible under section 8-1 of the ITAA 1997 as they are considered private or domestic in nature. Taxation Determination TD 93/29 Income tax: if an employee incurs legal expenses recovering wages paid by a dishonoured cheque, are these legal expenses an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997? discusses the Commissioner's view on the deductibility of legal expenses. With regards to whether legal expenses are deductible, paragraph 1 of Tax Determination TD 93/29 states: Yes, providing that the legal action relates solely to the recovery of wages. This is because in deciding '... whether expenditure has the character of a capital or of a revenue payment ... the advantage for which the expenditure was incurred must be identified and the manner in which it "is to be relied upon or enjoyed" must be considered ...'. ( Magna Alloys & Research Pty. Ltd. v. FC of T 80 ATC 4542 at 4548; 11 ATR 276 at 283). In your case, you have a work-related injury and liability had been accepted through a government insurer in the form of reimbursement of your medical expenses. After the insurer ceased any further reimbursements for these entitlements, you engaged a lawyer and incurred legal and other expenses to dispute their decision which for the greater part was consequently overturned. In considering the nature of the legal expenses that you have incurred, the benefit you sought in engaging in legal proceedings was the restoration of reimbursements of medical expenses. These benefits are considered private or domestic in nature and therefore the legal expenses that you have incurred in seeking restoration of these reimbursements are also considered private or domestic in nature. It is acknowledged that the legal action that you have taken may have other indirect consequences. However this does not negate the fact that you have incurred the legal expenses specifically to have your entitlements to medical expenses reimbursements reinstated, and these expenses are considered private or domestic in nature. Accordingly, you are not entitled to a deduction for the expenses that you have incurred in relation to your legal proceedings under section 8-1 of the ITAA 1997.