ATO ID 2001/667: Legal Expenses - to recoup full entitlement to a superannuation lump sum payment
Date of decision: 11 September 2001
Business line: Small Business/Individual Taxpayers

Issue
Is the taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for legal expenses incurred in recouping their full entitlement to a lump sum superannuation payment?

Decision
No, the taxpayer is not entitled to a deduction under section 8-1 of the ITAA 1997 for legal expenses incurred in recouping their full entitlement to a lump sum superannuation payment.

Facts
The taxpayer received a partial lump sum payment from their employer's superannuation fund. The taxpayer took legal action, and incurred legal expenses, in order to receive their full entitlement to their full lump sum superannuation payment. The superannuation payment received by the taxpayer was for the loss of their future earning capacity calculated until their retirement age. The taxpayer received the balance of their lump sum superannuation entitlement in the current income year. The lump sum payment received qualified as a superannuation benefit. The taxpayer included the taxable component of the superannuation benefit in their assessable income.

Reasons for decision
Summary: Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature. 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 capital nature then the expenses incurred in gaining the advantage will also be of a capital nature. The fact that a capital payment is specifically brought to account as assessable income will not change the nature of the payment. An amount that is capital in nature will remain capital notwithstanding that it is specifically included in the assessable income of the taxpayer The lump sum superannuation benefit, being a payment for the loss of the taxpayer's earning capacity, is a capital receipt. The taxpayer incurred the legal expenses in order to obtain the superannuation benefit. Although the taxable component of the superannuation benefit is included in the taxpayer's assessable income, the superannuation benefit retains its character as a capital receipt. As the legal expenses were incurred in gaining a capital sum they will also be of a capital nature and are therefore not deductible under section 8-1 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 section 8-1 section 307-8 subsection 301-20(1) subsection 301-35(1) subsection 301-95(1) subsection 301-105(1) subsection 301-115(1)
Case references: Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634 [1946] HCA 34
Related ATO interpretative decisions: ATO ID 2001/622
Subject references: Legal expenses Employer sponsored superannuation funds Lump sum superannuation benefits