Issue
Are the legal expenses incurred in obtaining a Total and Permanent Disability benefit for loss of salary and wage income an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The legal expenses incurred in obtaining a Total and Permanent Disability benefit for loss of salary and wage income are an allowable deduction under section 8-1 of the ITAA 1997.
Facts
The taxpayer received a lump sum payment in respect of a Total and Permanent Disability benefit.
The benefit was paid as compensation for the loss of salary and wage income, and not for the loss of income earning capacity.
The benefit forms part of the taxpayer's taxable income in the year in which it is received.
The taxpayer incurred legal expenses in obtaining this payment.
Reasons for Decision
Section 8-1 of the ITAA 1997 states that you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing assessable income and is not: • capital, private or domestic in nature • incurred in gaining or producing exempt income or non-assessable non-exempt income; or • prohibited by a section of the ITAA 1997 or the Income Tax Assessment Act 1936 (ITAA 1936).
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] HCA 34. The nature or character of the legal expenses follows the advantage which is sought to be gained by incurring the expenses. If the advantage to be gained is of a revenue nature, then the costs incurred in gaining the advantage will also be of a revenue nature.
The legal expenses were incurred by the taxpayer in order to obtain compensation for the loss of salary and wage income, and not for the loss of income earning capacity. Thus, the advantage which the taxpayer sought in incurring the legal expenses was an advantage of a revenue rather than capital nature.
Further, the legal expenses were not private or domestic in nature, were not incurred in gaining or producing exempt income or non-assessable non-exempt income, and were not an outgoing prohibited from being deductible by a section of the ITAA 1997 or the ITAA 1936.
Therefore, the legal expenses are deductible under section 8-1 of the ITAA 1997.
Amendment History
Date of amendment Part Comment 13 June 2014 Issue, Decision, Facts Updated to include reference to loss of salary and wage income. Reasons for Decision Updated to include case law precedent from Hallstroms Pty Ltd v FC of T and provide clarity of reasoning. Case References Updated to include case reference. Related Public Rulings Updated to include reference to TR 2012/8.
Date of amendment | Part | Comment
13 June 2014 | Issue, Decision, Facts | Updated to include reference to loss of salary and wage income.
Reasons for Decision | Updated to include case law precedent from Hallstroms Pty Ltd v FC of T and provide clarity of reasoning.
Case References | Updated to include case reference.
Related Public Rulings | Updated to include reference to TR 2012/8.