Private ruling: Legal expenses
Published: November 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a deduction for legal expenses incurred in the 2013-14 financial year? | A1: No.

Relevant facts and circumstances: The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: • the application for private ruling, and • the information provided with the application for private ruling. You suffered an industrial accident and became temporarily disabled. You applied to withdraw your superannuation and for an insured benefit. The insurer refused to release the insured benefit. You were forced to seek legal representation that was eventually successful in having the insured benefit released to you. Legal fees amounted to $X and were paid in the 2013-14 financial year. The legal fees only related to the recovery of the insured benefit amount. The insured benefit is a capital payment which is not assessable according to information provided from the insurer.

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) provides that a loss or an outgoing is an allowable deduction if it is incurred in producing assessable income unless that loss or outgoing is capital or of a 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). 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. In your case you incurred legal expenses in pursuing a legal action to recover a capital payment. 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.