Private ruling: The medical expense tax offset
Published: March 2014
Ruling period: Year ended 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 July 2012

Ruling: Q1: Are expenses in relation to in-vitro fertilisation (IVF) procedures for you and your spouse eligible medical expenses for the purposes of the medical expenses tax offset? | A1: Yes. | Q2: Are expenses in relation to surrogacy and egg donation eligible medical expenses for the purposes of the medical expenses tax offset? | A2: No. | Q3: Are the amounts paid for airfares, accommodation, transportation and meals eligible medical expenses for the purposes of the medical expenses tax offset? | A3: No. | Q4: Are the non-medical items paid from your solicitor's trust account eligible medical expenses for the purposes of the medical expenses tax offset? | A4: No.

Relevant facts and circumstances: You and your spouse are Australian residents for income tax purpose. You have been diagnosed with a medical condition which makes conception and carrying a child to full term difficult. After consultation with a legally qualified medical practitioner you and your spouse decided to try to conceive a child through the services of a gestational surrogate. The surrogate is a resident of an overseas country. You and your spouse travelled overseas to participate in several IVF cycles using your eggs and your spouse's sperm, which did not result in a viable pregnancy for the surrogate. In 2013 your surrogate participated in another IVF cycle. This treatment entailed the use of a donor egg sourced overseas and your spouse's sperm. This procedure resulted in a viable pregnancy. All payments for the IVF cycles have been made to a legally qualified medical practitioner. The medication and tests used in the IVF procedures was prescribed by a legally qualified medical practitioner. You have paid for all the IVF procedures for you and the surrogate directly to the IVF clinics. You have paid for airfares, accommodation and meals to travel overseas to participate in the IVF cycles and for the surrogate's birth. All other costs have been paid by your solicitor overseas through monies deposited by you into a trust account.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 159P | Income Tax Assessment Act 1936 Subsection 159P(1) | Income Tax Assessment Act 1936 Subsection 159P(4) | Income Tax Assessment Act 1936 Paragraph 159P(4)(a)

Reasons for decision: Summary: A medical expenses tax offset is available under subsection 159P(1) of the Income Tax Assessment Act 1936 (ITAA 1936) where the taxpayer pays eligible medical expenses in an income year for themselves or a dependant who is an Australian resident. The medical expenses tax offset is only available if the amount of medical expenses, after being reduced by any entitlement to reimbursement from a health fund or government authority such as Medicare, exceeds the threshold amount. The amount of net medical expenses tax offset you can claim now depends on your level of income as the rebate is now income tested. This not only affects the threshold amount but also the percentage of the rebate you can claim. It should also be noted that the threshold amount is subject to indexation and will change in future income years. In order for a medical expense to be treated as a rebateable medical expense, the expense must fall within the definition of 'medical expenses' as contained in subsection 159P(4) of the ITAA 1936. Based on your circumstances, paragraph 159P(4)(a) of the ITAA 1936 would be the only provision where your expenses can be considered to qualify as medical expenses. Paragraph (a) of the definition of medical expenses in subsection 159P(4) of the ITAA 1936 includes payments made to a legally qualified medical practitioner, nurse or chemist, or a public or private hospital, in respect of an illness or operation. To qualify for the tax offset the medical expenses must be paid by a resident taxpayer in respect of themselves or a resident dependant. However it is not necessary that the payments be made to a resident of Australia or that they be paid in Australia. Therefore, we have to determine whether the payments you have made qualify as medical expenses for the purposes of the medical expense tax offset. | Detailed Reasoning - IVF procedures for you and your spouse: Taxation Ruling IT 2359 Income tax: medical expenses - in vitro fertilization states that infertility is an illness within the ordinary meaning of the term and payments to a legally qualified medical practitioner or hospital for treatment under an IVF program qualify as medical expenses. In your case, you made payments to an overseas fertility clinic in regards to IVF treatment for you and your resident dependant spouse. The procedure was undertaken by a legally qualified medical practitioner and the medication required for the procedure was prescribed. Therefore, the portion of the payments made to the IVF clinics for the IVF cycles which relate to you and your spouse qualify as eligible medical expenses within the meaning of subsection 159P(4) of the ITAA 1936 and you are entitled to include these expenses in the calculation of the medical expenses tax offset. | Detailed Reasoning - IVF costs in relation to the surrogacy and egg donation: Subsection 159P(1) of the ITAA 1936 provides that the medical expenses must be 'paid' in respect of the taxpayer, or a resident dependant of the taxpayer, to qualify for the medical expenses tax offset. A 'dependant' is defined in subsection 159P(4) of the ITAA 1936 as: • the (legal or de facto) spouse of the taxpayer; or • a child of the taxpayer who is under 21 years of age; or • a person for whom the taxpayer is entitled to a dependants rebate, or a child or student in respect of whom the taxpayer qualifies for a notional dependants rebate. As the surrogate and egg donor are not considered to be your dependants, the medical expenses have not been paid in respect of a resident dependant as defined in subsection 159P(4) of the ITAA 1936. Therefore, you cannot include any of the costs paid in relation to the surrogacy or egg donation as part of the calculation for the medical expenses tax offset. You have made mention of ATO Interpretive Decisions ATO ID 2001/669 Income tax: medical expenses tax offset - purchase of donor sperm from overseas . In ATO ID 2001/669 the cost of obtaining the donor sperm was considered part of the cost of the IVF treatment as the payment was paid to a legally qualified medical practitioner in respect to treatment received by an Australian resident taxpayer who suffered from infertility. Your situation can be distinguished from the taxpayer in this ATO view. The medical expenses you have paid are in relation to IVF treatment for a person who is not your resident dependant or an Australian resident. The expenses you have paid are also not in relation to an illness as the surrogate does not suffer from the condition of infertility. | Detailed Reasoning - Travel expenses: Subsection 159P(4) of the ITAA 1936 specifically defines medical expenses which are eligible for the medical expenses rebate. The definition does not include travel and it associated costs to obtain medical treatment In your case, you and your spouse have made several trips to the US for IVF treatment. While the overseas travel expenses which include airfares, accommodation, transportation and meals were necessary in order for you to receive the treatment, it is not a payment in respect of the medical treatment. Accordingly, the travel expenses you have paid in order to obtain IVF treatment overseas as well as attending the surrogates birth are not medical expenses as defined in subsection 159P(4) of the ITAA 1936 and cannot be included when calculating your eligibility to the medical expenses tax offset. | Detailed Reasoning - Items paid through the solicitors trust account: The non-medical items paid from your solicitor's trust account do not fall within the definition of 'medical expenses' as contained in subsection 159P(4) ITAA . Therefore, you cannot include any of these payments in your calculation for eligibility to the medical expenses tax offset.