1 Are you entitled to claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for all legal expenses you have incurred to date?
1 No. However, you are entitled to a partial deduction. Based on the facts provided, the Commissioner accepts the legal expenses you incurred to reinstate your compensation payments are deductible because the advantage you sought is ordinary income. See Paragraph 7 of Taxation Determination TD 93/29 Income tax: if an employee incurs legal expense 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 which discusses the apportionment of legal expenses. Issue 2: Deducibility of Travel Expenses Question 2 Are the travel expenses incurred to attend medical appointments deductible under section 8-1 of the ITAA 1997? Answer 2 No. Question 3 Are the travel expenses incurred to attend medical appointments including independent medical examinations (IMEs) to obtain a medical certificate at regular intervals to the insurer as a condition of receipt of compensation payments deductible under section 8-1 of the ITAA 1997 ? Answer 3
Yes. Travel expenses incurred to attend medical appointments to obtain a medical certificate and/ or to attend IMEs are deductible, as they were required to be made in order to continue receiving your compensation payments from the insurer. Issue 3: Work related expenses Question 4 Are you entitled to claim a deduction for the costs incurred in relation to your work-related expenses (purchase of a computer and software, monthly phone and internet usage charges)? Answer 4 Yes. To claim a deduction for mobile phone calls and internet (data), you must meet all of the following conditions: • You must incur the cost and make the phone calls or use the data to perform your work duties. • You must have a record of your expenses showing the total amount you incurred and how you calculated your work-related phone calls and data. You can only claim the work-related portion of your expenses as a deduction. Refer to our webpage QC 72150, Assets costing $ 300 or less , for further information on the 4 tests you need to satisfy to claim an immediate deduction for a depreciating asset you use for work that cost $300 or less.
For depreciating assets that cost $300 or more the decline in value of the asset is claimed over time (Division 40 of the ITAA 1997). You can make this claim each year, over the effective life of the asset, that it is used for work purposes. When you are no longer using these assets in gaining your assessable income, you cannot claim a deduction, unless you use them again for income producing purposes. This ruling applies for the following period: 30 June 20XX The scheme commenced on: 1 July 20XX
In MM 20XX, you suffered a injury and are unable to return to your preinjury occupation. Since MM 20 XX, you have been in receipt of compensation payments. Company A is your compensation insurer. In MM 20XX, your compensation payments were suspended and you sought legal representation to have them reinstated. Between MM 20XX and M 20XX, you retained legal representation to assist you in the following: • the reinstatement of your compensation payments • approval for surgery and • your permanent injury claim. In MM 20XX, a conciliation conference was held and your compensation payments were subsequently reinstated. In MM 20XX, you received a lump sum payment of approximately $X from Company A for your permanent injury. From these settlement monies, you paid $X in legal fees for work undertaken by your lawyer between MM 20XX and MM 20XX. Your lawyer has not been able to provide you with an itemised account for the work undertaken. You have provided us with a copy of the Statement of Trust dated DD MM 20XX. Since MM 20 XX, you have incurred transport expenses to attend the following.
• medical and allied health appointments for treatment and to obtain medication. • medical appointments to obtain doctors certificates and to undergo independent medical examinations (IMEs) as required by your compensation insurer. Specifically, during the ruling period, you have incurred travel expenses to attend: • over X allied health appointments for treatment • X appointments to your doctor for medication and to obtain medical certificates. • attend X IMEs as required by your insurer. You are unable to return to your preinjury occupation. In MM 20 X, in accordance with the relevant compensation legislation and principles of the relevant Clinical Framework. Company A approved and paid for a Diploma in X. In MM 20XX you purchased a computer for $X and software for $ X for the following reasons: • to assist you in undertaking your Diploma in X. • to upload medical certificates and invoices to your Company A. • to attend telehealth appointments with doctors relating to your injury.
You are required to use the internet and your phone to undertake tasks as required by Company A to continue receiving compensation payments. You incur the following expenses: • internet monthly $X • monthly phone $X You do not have any outstanding legal fees. You do not have any professional indemnity insurance. You have not sought and will not seek to recover costs from the other party. As at MM 20XX, you continue to receive compensation payments.
Income Tax Assessment Act 1997 section 8-1 Income Tax Assessment Act 1997 section 6-5 Income Tax Assessment Act 1997 Division 40
Issue 1: Deductibility of Legal expenses Question 1 Are you entitled to claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for all legal expenses you have incurred to date? Summary No. However, you are entitled to a partial deduction. Based on the facts provided, the Commissioner accepts the legal expenses you incurred to reinstate your compensation payments are deductible because the advantage you sought is ordinary income. See Paragraph 7 of Taxation Determination TD 93/29 Income tax: if an employee incurs legal expense 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 which discusses the apportionment legal expenses. An acceptable method to apportion your expenses is according to the dollar value of the assessable amount as compared to the total amount being sought. The relevant percentage that relates to your assessable income can then be applied to the legal expenses incurred. Detailed reasoning
Sections 6-5 and 6-10 of the ITAA 1997 provides that the assessable income of an Australian resident includes ordinary and statutory income (for example, capital gains) derived directly and indirectly from all sources, whether in or out of Australia during the income year. The ITAA 1997 does not provide specific guidance on the meaning of ordinary income. However, a substantial body of case law exists which identifies its likely characteristics. Amounts that are periodic, regular or recurrent and relied upon by the recipient for their regular expenditure are likely to be ordinary income, as are amounts that are the product of any employment of, or services rendered by, the recipient. Further, amounts which compensate for lost income or serve as a substitute for other income are themselves income according to ordinary concepts. Section 8-1 of the Income Tax Assessment Act 1997
(ITAA 1997) allows a deduction for a loss or an outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature. In determining whether a deduction for legal expenses is allowable under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered. The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses. If the advantage to be gained is of a capital nature, then the expenses incurred in gaining the advantage will also be of a capital nature. Taxation Determination TD 93/29 Income tax: if an employee incurs legal expense 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? outlines the Commissioners view on legal expenses. The ruling states that if an employee incurs legal expense in recovering wages, the legal expenses are an allowable deduction providing that the legal action relates solely to the recovery of wages.
Amounts received in respect of personal injury which are not direct compensation for loss of income will usually be capital in nature and are potentially taxable as statutory income under the capital gains tax provisions (CGT) provisions of the ITAA 1997. Receipt of a lump sum payment may give rise to a capital gain (statutory income). However, subparagraph 118-37(1)(a)(ii) of the ITAA 1997 entitles a taxpayer to disregard any capital gain or loss made from a capital gains tax event relating directly to compensation or damages received for any injury, illness or wrong the taxpayer suffers personally. Taxation Ruling TR 95/35 deals with the capital gains treatment of compensation receipts. The ruling advocates a 'look-through' approach, which identifies the most relevant asset to which the compensation amount is most directly related. Paragraph 11 of TR 95/35 states that if an amount is not received in respect of an underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation and may result in a capital gain. Paragraph 19 of TR 95/35 provides the following:
Compensation received by an individual for any wrong or injury suffered to his or her person or in his or her profession or vocation is exempt from CGT under subsection 160ZB(1). Subsection 160ZB(1) of the Income Tax Assessment Act 1936 was repealed and replaced by section 118-37 of the ITAA 1997. Apportionment of expenses Apportionment is a question of fact and involves a determination of the proportion of the expenditure that is attributable to deductible purposes. The Commissioner believes that the method of apportionment must be fair and reasonable in all the circumstances. 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? Provides guidance on apportionment of legal expenses, at paragraph 7: If the solicitor's account is not itemised, a possible basis for apportionment would be either a reasonable costing of the work undertaken by the solicitor in relation to the revenue claim, or, where this is not possible, an apportionment on the basis of the monetary value of the revenue claim relative to the capital claim.
Application to your circumstances In your case, the costs you incurred to have your income maintenance payments reinstated are an allowable deduction under section 8-1 of the ITAA 1997. This is because the expenses relating to legal advice sought are revenue in nature, being the replacement of wages. However, you will not be able to claim as a deduction the incurred in seeking advice regarding your lump sum permanent impairment payment that was made as part of your compensation claim because payment is capital in nature. You should apply the above principles in paragraph 7 of TD 93/29 in undertaking the apportionment.. If the solicitor's account is not itemised, a possible basis for apportionment would be either a reasonable costing of the work undertaken by the solicitor in relation to the revenue claim, or, where this is not possible, an apportionment on the basis of the monetary value of the revenue claim( ie your wages paid ) vs relative to the capital claim( personal injury / impairment claim). As your legal expenses have not been itemised by your lawyer, you will need to calculate the deductible portion. As noted above 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? Provides guidance on apportionment of legal expenses, at paragraph 7. Issue 2: Deducibility of Travel Expenses and medical expenses Question 2 Are the travel expenses incurred to attend medical appointments deductible under section 8-1 of the ITAA 1997? Summary No. Question 3 Are the travel expenses incurred to attend medical appointments including independent medical examinations (IMEs) to obtain a medical certificate at regular intervals to the insurer as a condition of receipt of compensation payments deductible under section 8-1 of the ITAA 1997? Summary Yes. Travel expenses incurred to attend medical appointments to obtain a medical certificate and/ or to attend IMEs are deductible, as they were required to be made in order to continue receiving your income maintenance payments from the insurer. Detailed reasoning
Generally medical expenses and associated travel expenses for treatment and rehabilitation have a private character, even if they are a requirement for receiving assessable income. Subsection 8-1 (2) of the ITAA 1997 states that you cannot deduct a loss or outgoing if it is of a private or domestic nature. However, where it can be shown that a medical expense has the required nexus between the expense and earning of assessable income, the expense may be deductible. Where the expense is required for payment of income maintenance payments, there is a direct connection between the expense and the earning of assessable income. The requirement for the taxpayer to provide a medical certificate at regular intervals to the paying authority to ensure the continued receipt of compensation payments, is analogous to the activity test considered by the High Court in Federal Commissioner of Taxation v. Anstis
(2010) 241 CLR 443; (2010) 2010 ATC 20-221; (2010) 76 ATR 735 (Anstis). In the taxpayer's case, the travel by plane to attend appointments is a necessary part of obtaining the required medical certificate to maintain the taxpayer's statutory entitlement to compensation payments. The travel expenses are incurred in maintaining the entitlement to income by satisfying the specific requirements of the compensation legislation and are therefore incurred in gaining or producing the assessable compensation payments. Application to your circumstances You are required to fulfil certain requirements in order to continue receiving receive compensation payments, namely obtain medical certificates and to attend IMEs. In your case you will be able to claim a deduction for travel expenses incurred to attend IMEs and appointments attended for the purpose of obtaining medical certificates as required by Company A. You cannot claim transport expenses for medical or allied health appointments that you attend for treatment or medication. Issue 3: Work related expenses Question 4
Are you entitled to claim a deduction for the costs incurred in relation to your work-related expenses (purchase of a computer and software; monthly phone and internet usage charges)? Summary Yes. You must meet all of the following conditions: • You must incur the cost and make the phone calls or use the data to perform your work duties. • You must have a record of your expenses showing the total amount you incurred and how you calculated your work-related phone calls and data. You can only claim the work-related portion of your expenses as a deduction. You will need to apportion your deduction to exclude any private use. Refer to our webpage QC 72150, Assets costing $ 300 or less , for further information on the 4 tests you need to satisfy to claim an immediate deduction for a depreciating asset you use for work that cost $300 or less.
For depreciating assets that cost $300.00 or more the decline in value of the asset is claimed over time (Division 40 of the ITAA 1997). You can make this claim each year, over the effective life of the asset, that it is used for work purposes. When you are no longer using these assets in gaining your assessable income, you cannot claim a deduction, unless you use them again for income producing purposes. Detailed Reasoning Phone and internet usage An employee may be able to deduct the unreimbursed cost of telephone calls and home internet use, to the extent these costs relate to the course of their employment. Evidence that an employer requires an employee to work from home, or to make work calls, supports a deduction claim. An employee normally determines the work-related percentage of their phone and internet costs by establishing a pattern of use over a 4-week representative period. This is achieved by keeping diary records of work calls and work-internet use. The pattern-of-use percentage is then applied on a reasonable basis to the yearly costs, noting that leave periods are excluded.
Itemised bills assist in the calculation and should be used if provided. Specifically, a pattern of work-call use may be determined by comparing both the number of work calls (incoming and outgoing) and the time spent on such calls, with the total over the representative period. For internet use, an itemised bill in conjunction with diary records help establish the data downloads for work over the representative period. The amount is compared with the total household downloads on the taxpayer's account to establish a work-use percentage (data basis). The time a taxpayer spends on their home internet for work over the representative period, compared with the total household time on the taxpayer's internet account, may also establish a work-use percentage (time basis). The data basis and time basis might need to be considered together in some situations to determine a reasonable percentage. Purchase of a new computer and software
For depreciating assets that cost $300.00 or more the decline in value of the asset is claimed over time (Division 40 of the ITAA 1997). A deduction is allowed for the cost of a depreciating asset by spreading the deduction over the effective life of the asset. There are examples on our website of how to calculate the decline in value. You also need to work out the number of days in the year that you held the asset, and the number of days that it was used for a taxable purpose. You can make this claim each year, over the effective life of the asset, that it is used for work purposes. When you are no longer using these assets in gaining your assessable income, you cannot claim a deduction, unless you use them again for income producing purposes. Application to your circumstances
In your case you purchased a computer and software to undertake the Diploma of X studies course which was approved and paid for by Company A. You also used the computer to upload medical certificates and invoices to Company A. Consequently, you are entitled to claim a partial deduction for the decline in their value to the extent that they are used for income producing purposes and the cost of these items has not been reimbursed by Company A. You will need to apportion your deduction to exclude any private use. As discussed above, Further information can be found on our webpage. Refer to our webpage QC 72150, Assets costing $300 or less , for further information on the 4 tests you need to satisfy to claim an immediate deduction for a depreciation certain non-business depreciating assets for a depreciating asset you use for work that cost $300 or less.
For depreciating assets that cost $300.00 or more the decline in value of the asset is claimed over time (Division 40 of the ITAA 1997). You can make this claim each year, over the effective life of the asset, that it is used for work purposes. When you are no longer using these assets in gaining your assessable income, you cannot claim a deduction, unless you use them again for income producing purposes. As discussed above, for the telephone and internet usage expenses, you must meet all of the following conditions to be eligible to claim a deduction: • You must incur the cost and make the phone calls or use the data to perform your work (compensation related duties). • You must have a record of your expenses showing the total amount you incurred and how you calculated your work-related (compensation related) phone calls and data. You can only claim the work-related portion of your expenses as a deduction. You will need to apportion your deduction to exclude any private use.