Private ruling: Deductions - legal expenses
Date of advice: 25 October 2022
Published: 9 January 2023
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to claim a deduction for the legal expenses incurred in relation to your Total and Permanent Disablement (TPD) Claims under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: You had a work-related injury. You engaged a legal firm to lodge and handle your TPD Claims with your superannuation fund and insurance company. You received lump sum payments from your superannuation fund and insurance company which contained taxable components and tax-free components. Tax was withheld from the lump sum payments. You incurred legal expenses in relation to making your Claims.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1

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 expenses 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 that is sought to be gained by incurring the expenses. ATO Interpretative Decision ATO ID 2001/667 Income tax Legal expenses - to recoup full entitlement to a superannuation lump sum payment explains that 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. Whether a capital payment is specifically brought to account as assessable income does 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. | Detailed Reasoning - Application to your situation: In your case, you incurred legal expenses in order to obtain TPD lump sum payments. The lump sum payment is a capital receipt. The payment remains a capital receipt despite the fact that a portion of the lump sum payment is assessable. As the payments you received are capital in nature, the expenses incurred in securing the payments are also capital in nature. Consequently, no deduction is allowable under section 8-1 of the ITAA 1997 for the legal expenses you incurred as expenditure of a capital nature is expressly excluded.