A recent private ruling has highlighted instances where legal expenses are considered deductible under the general provisions of ITAA 1997 s 8-1. Under the provision, a deduction is allowed for legal expenses which are incurred in order to earn assessable income or in carrying on a business.

However, a deduction is not allowed for legal expenses which are capital expenses or are private and domestic in nature. Working out if a legal expense is a deductible or non-deductible capital or private expenditure depends on the facts and circumstances. This question is the subject of much litigation in the courts and tribunals.

The following is a set of circumstances in which legal expenses have been determined to be deductible by the ATO in a recent private ruling.

Relevant facts and circumstances

The taxpayer was employed for a number of years but began suffering for a medical condition caused by workplace bullying and harassment.

A claim was made for worker’s compensation through an agency, which was eventually accepted. The taxpayer was paid 75% of regular salary payments.

The taxpayer made attempts to re-engage with the employer to return to work, under a different supervisor. However, no offer was received.

After a few months, the employer terminated the taxpayer’s rehabilitation program. After this termination, the taxpayer made a submission to the agency to review the decision but this was unsuccessful.

The taxpayer sought legal advice. Through the lawyer’s advocacy, an offer of a work trial was received by the taxpayer. At this time, the taxpayer’s salary returned to 100% of regular payments.

Before the work trial, the agency determined that the taxpayer no longer suffered from the medical condition. As a result, the agency revoked the compensation claim payments. A further review of the agency’s decision was submitted by the taxpayer, which was ultimately unsuccessful.

The taxpayer sought legal advice and the lawyers lodged an application with the Administrative Appeals Tribunal for a review of the agency’s decision to revoke the compensation payments.

After two months of the work trial, the employer made the taxpayer redundant.

Months later, the AAT made settlement orders where the taxpayer was deemed entitled to compensation payments and medical expenses with respect to the medical condition.

ATO ruling

The taxpayer requested the ATO rule on whether the following legal expenses were deductible:

• • Advice and advocacy to gain a return to work opportunity, and
• • Out of pocket legal expenses incurred to apply to the AAT to review the agency’s decision.

The ATO ruled in both instances that the amounts were deductible under the general provision. Despite the fact that the taxpayer’s employment had been terminated, the amounts related to compensation that would have been received as a result of employment.