Private ruling: Costs incurred for Total permanent disability payment, income protection payment and investment advice
Date of advice: 22 December 2017
Published: May 2018
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Are you entitled to a deduction for legal fees incurred in seeking a Total Permanent Disability compensation payment from your superannuation fund? | A1: No | Q2: Are you entitled to a deduction for costs incurred in gaining an Income Protection payment from your superannuation fund? | A2: Yes Issue 2 Deduction for Investment advice | Q3: Are you entitled to a deduction for the costs incurred in receiving ongoing investment advice? Answer No

Relevant facts and circumstances: You are an Australian resident for taxation purposes. You suffered an injury. You engaged legal representatives to pursue a total permanent disability (TPD) claim through your superannuation fund. You incurred costs in the pursuit of this claim. You received a lump sum TPD payment from your super fund. You engaged financial advisors to pursue an Income protection (IP) claim through your superannuation fund and to provide other financial advisory services. You incurred costs in pursuit of this claim and the other services performed in conjunction with and separate to this claim. You received a, IP lump sum payment from the insurance underwriters of your super fund.

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

Reasons for decision: Detailed Reasoning - Question 1: 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, or relate to the earning of assessable income. 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. An amount that is capital in nature will remain capital notwithstanding that it is specifically included in the assessable income of the taxpayer. In your case, you incurred legal expenses in order to obtain TPD benefits from your superannuation funds. These payments were for the loss of your earning capacity and therefore considered capital receipts. The payments remain capital receipts despite the fact that a portion of the lump sum payments are assessable. As the payments you received as a result of your legal action are capital in nature, the expenses incurred in pursuing your claims 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. | Detailed Reasoning - Question 2: When considering the costs incurred by you in pursuing your IP payment in relation to section 8-1 of the ITAA 1997 it is considered that the costs that can be directly linked to securing the IP payment were incurred in generating your assessable income. The amount of the costs that directly relate to the pursuit of your IP claim based on the billing and invoice information supplied, are an allowable deduction under section 8-1 of the ITAA 1997. | Detailed Reasoning - Question 1: Taxation Determination TD 95/60 Income tax: are fees paid for obtaining investment advice an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for taxpayers who are not carrying on an investment business? discusses when we would consider that costs incurred in relation to investments would be considered part of the initial investment establishment or part of the servicing of an established income producing asset. The advisory costs incurred in relation to the ongoing care services for investment advice are considered to be in order to establish a new income producing asset. It is not expenditure incurred in the course of gaining or producing the assessable income from the asset as no changes to investments or new investments has yet been made and no statement of advice has been issued by the financial advisors. It is too early in time to be an expense that is part of the income producing process and is considered a preliminary cost and incurred at a point too soon. As it is an expense associated with putting the income earning investment in place, it has an insufficient connection with earning income from the asset. It is incidental and relevant to outlaying the price of acquiring and establishing the asset, and is associated more closely with the making of the investment so warrants the conclusion that it is capital or capital in nature. As such a deduction is not allowable for the costs incurred for the ongoing advice service under section 8-1 of the ITAA1997.

Issue 1: Deduction for costs incurred for Total Permanent Disability and Income Protection payments.