Private ruling: Legal expenses
Date of advice: 17 September 2025
Published: 10 November 2025
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q2: Are you entitled to claim a deduction for legal expenses incurred to obtain your total permanent disability benefits from your superannuation fund deductible? Summary 2 No.

Relevant facts and circumstances: Background You sustained a X injury, outside of the workplace, approximately X years ago. During 20XX, due to ongoing pain and suffering you were placed on the public hospital waiting list for X surgery. On DD MM 20XX, you underwent X surgery, followed by a second procedure in MM 20XX, which was unsuccessful. You were subsequently diagnosed with X. As a result, you have been unable to return to your previous occupation. During the 20XX income year, your employment ended due to redundancy. In late MM 20XX you engaged your lawyers to represent you to make claims on your income protection (IP) and total permanent disability (TPD) insurance benefits held through your superannuation fund. Your income protection insurance claim On DD MM 20XX, your IP insurance claim was approved by the life insurer to your Superannuation fund. You have provided us with a copy of the approval letter which states the following: • Your Income protection claim has been approved on DD MM 20XX. • Your waiting period of 60 days commended on the provisional date of disablement, which in your case was DD MM 20XX. • Benefits will start to accrue after the end of the waiting period from DD MM 20XX and are payable monthly in arrears. On or around DD MM 20XX, the life insurer wrote to your lawyers to confirm your income protection benefit had been paid. You provided us with a copy of the letter which states the following: • We have deposited $x into the nominated bank account on DD MM 20XX. You received a lump sum payment of $x (tax deducted $x) as arrears for the benefit period between DD MM 20XX to DD MM 20XX. You continue to receive IP payments of $x monthly for the remainder of your IP benefit period of 2 years. On DD MM 20XX, your lawyers issued tax invoice 'Your Superannuation Fund Income Protection' which you paid same day. You have provided us with a copy of the invoice 'Your Superannuation Fund Income Protection claim' which includes the following: Your Superannuation Fund Income Protection claim -Summary of amount Due In early MM 20XX, your TPD claim was approved, and you received a TPD benefit payment of $X. On DD MM 20XX, your lawyers issued tax invoice., 'Your Superannuation Fund Super Total and Permanent Disability' . You paid these legal expenses and disbursements the same day you received your TPD benefit payment. You have provided us a copy of the invoice which includes the following: Your Superannuation Fund Super Total and Permanent Disability' - Summary of amount Due You advise the disbursement of $x is for the cost of a report prepared by your general practitioner.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 6-5

Reasons for decision: Summary: Yes. The income protection insurance benefits, as a replacement for ordinary income during periods in which you were unable to earn income, are considered assessable income. Therefore, the legal expenses of $X were incurred in gaining assessable income; they are considered revenue in nature and are therefore deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). | Detailed Reasoning - 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. S ection 8-1 of the 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. | Detailed Reasoning - Application to your circumstances: In your case, the legal costs of $X, you incurred to obtain your income protection insurance benefits 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 ordinary income. | Detailed Reasoning - Question 2: Are you entitled to claim a deduction for the legal expenses incurred to obtain your total permanent disability insurance benefits from your superannuation fund? | Summary: No. The lump sum superannuation benefit, as compensation for the loss of your earning capacity, is considered a capital receipt. Therefore, the legal expenses of $x were incurred in gaining a capital receipt, they are also considered capital in nature and are therefore not deductible under section 8-1 of the ITAA 1997. Additionally, the doctor's expense of $x cannot be deducted as they were incurred to obtain your TPD insurance benefits. | Detailed Reasoning - Detailed reasoning: The taxation of superannuation payments is determined by specific legislative provisions. Superannuation capital payments, or parts of such payments, may nevertheless be included in assessable income by those specific legislative provisions. 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 95/35 Income tax: capital gains: treatment of compensation receipts (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. ATO Interpretative Decision ATO ID 2001/667 Income Tax Legal Expenses - to recoup full entitlement to a superannuation lump sum payment. (ATO ID 2001/667) outlines that where the advantage to be gained is of a capital nature-such as a lump sum superannuation benefit received as compensation for lost earning capacity-the related legal expenses are also considered capital in nature. This remains true even if the capital amount is included in assessable income. As such, the legal expenses incurred in gaining the lump sum are not deductible under section 8-1 of the ITAA 1997. | Detailed Reasoning - Application to your circumstances: In your case, the lump sum superannuation benefit, as compensation for the loss of your earning capacity, is considered a capital receipt. Therefore, the legal expenses of $ x were incurred in gaining a capital receipt, they are also considered capital in nature and are therefore not deductible under section 8-1 of the ITAA 1997. Additionally, the doctors' expenses of $x cannot be deducted as they were incurred in the course of pursuing your TPD insurance benefit. As outlined above, even if there is a taxed element of your TPD superannuation benefit included in your assessable income, the superannuation benefit retains its character as a capital receipt. Therefore, as the TPD benefit received is capital in nature, the expenses incurred in relation to your claim are also capital in nature. Consequently, no deduction is allowable under section 8-1 of the ITAA 1997 for the legal expenses you incurred in relation to your disability benefit as expenditure of a capital nature is expressly excluded under section 8-1 of the ITAA 1997.

Question 1: Are you entitled to claim a deduction for legal expenses incurred to obtain your income protection benefits from your superannuation fund? | Question 1: Are you entitled to claim a deduction for legal expenses incurred to obtain your income protection insurance benefits from your superannuation fund?