Medical expenses tax offset: reimbursement of medical expenses received as part of a compensation payment

Is the taxpayer required to reduce their medical expenses by a reimbursement amount received as part of a compensation payment, when calculating the rebatable amount for the purposes of the medical expense tax offset under section 159P of the Income Tax assessment Act 1936 (ITAA 1936)?

No. The taxpayer is not required to reduce their medical expenses by this reimbursement amount when calculating the rebatable amount for the purposes of the medical expense tax offset under section 159P of the ITAA 1936, as it is not an amount received from a government, public authority, society, association or fund.

The taxpayer suffered health problems as a result of the negligence of another person.

The taxpayer incurred medical expenses as defined in subsection 159P(4) of the ITAA 1936 as a result of the medical treatment required in dealing with those health problems.

The taxpayer took legal action as a result of which they received a compensation payment from the defendant to that legal action. This compensation payment contained a quantified amount as reimbursement of the taxpayer's medical expenses.

The defendant to the legal action was not a government or public authority, nor were they a society, association or fund.

A medical expense tax offset is available to a taxpayer under section 159P of the ITAA 1936 where the taxpayer incurs medical expenses for themselves or a dependant who is an Australian resident. Subsection 159P(3A) of the ITAA 1936 provides that the offset is allowable to a taxpayer whose 'rebatable amount' in the year exceeds $1,500.

Subsection 159P(1) of the ITAA 1936 provides that the 'rebatable amount' is the amount of medical expenses less any amount which the taxpayer is paid or is entitled to be paid by a government or public authority or a society, association or fund.

Subsection 159P(1) of the ITAA 1936 does not require the rebatable amount to be reduced where the payment is made to the taxpayer by a person or entity of a type other than those listed in that provision.

The taxpayer has received a payment, which included an amount for reimbursement of their medical expenses, from the defendant in a legal action. The defendant was not a government or public authority or a society, association or fund for the purposes of subsection 159P(1) of the ITAA 1936.

Therefore, the payment received by the taxpayer does not reduce the rebatable amount for the purposes of calculating their medical expenses tax offset under section 159P of the ITAA 1936.