Private ruling: Deductibility of legal fees
Date of advice: 12 February 2019
Published: May 2019
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Are the legal fees associated with your Total and Permanent Disablement insurance claim tax deductible? | A1: No

Relevant facts and circumstances: You suffered an injury. You engaged lawyers to assist with your Total and Permanent Disablement (TPD) insurance claim through your superannuation. The TPD claim was successful and $XX was paid to your super account. You made a withdrawal from your super account whilst under the preservation age. The lump sum payment was made up of a taxable component and a tax free component. The withdrawn monies from the super account were paid into your lawyers’ trust account and they deducted their legal fees and paid you the balance.

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

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (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) 3 AITR 436; (1946) 8 ATD 190). The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses. If the advantage 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 assessable income. In your circumstances, you incurred legal expenses in order to obtain your Total and Permanent Disablement benefit through your superannuation. Although the taxable component of the superannuation benefit is included in your assessable income, the superannuation benefit retains its character as a capital receipt. As the payment you received as a result of your legal action is capital in nature, the legal expenses incurred in pursuing your claim are also capital in nature. Therefore, no deduction is allowable under section 8-1 of the ITAA 1997 for the legal expenses you incurred.