Private ruling: Legal expenses
Date of advice: 14 December 2018
Published: April 2019
Ruling period: Year ended 30 June 2017 | Year ended 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: Are you entitled to a deduction for the legal expenses you incurred in relation to your claims for full entitlement to and for early payment of your superannuation benefits from your super fund? | A1: No.

Relevant facts and circumstances: You were diagnosed with an illness. Your treating doctors recommended that you do not work. You ceased work before retirement age as a result of your medical condition. You wanted to have access to your superannuation benefits with your super funds. Your claim with one super fund was successful in 2017 and you received a lump sum payout including a taxable component. You made a second claim with the other super fund when your first claim was denied. The second claim was successful in 2018 and you received a lump sum payout including a taxable component. You incurred legal expenses in relation to your claims for full entitlement to and in pursuing early payment of your superannuation benefits.

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) HCA 34). The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses. ATO ID 2001/667 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. Despite 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. ATO ID 2001/622 explains that legal expenses incurred in obtaining a superannuation lump sum payment before retirement age are not deductible. The early withdrawal of monies from a taxpayer's superannuation fund is an issue of a private nature. As such the legal expenses incurred in order to pursue early payment of the superannuation lump sum benefits are also private in nature. In your case you incurred the legal expenses to pursue early payment of your superannuation benefits before reaching your retirement age. The lump sum amounts you received from your super funds, which are sourced mainly from the insurance payments through the super funds, are your superannuation benefits and/ or disability superannuation benefits. The lump sum superannuation benefits, being payments for the loss of your earning capacity due to your medical condition, are capital receipts. As such the legal expenses that you incurred in relation to the claims you made are also capital in nature. Furthermore, the early withdrawal of monies from your super funds is an issue of a private nature. This is evidenced by your second claim with the other super fund when your first claim was denied. As such the legal expenses incurred in relation to pursuing early payment of your superannuation benefits are also private in nature. | Detailed Reasoning - Conclusion: You incurred the legal expenses in order to obtain full entitlement to your superannuation benefits. The lump sum superannuation benefits that you received are capital receipts. The pursuit for early payment of your superannuation benefits which is the early withdrawal of monies from your super funds is an issue of a private nature. It follows that the legal expenses you incurred in relation to your claims for full entitlement to your superannuation benefits and early withdrawal of monies from your super funds are also capital and private in nature. Therefore as the legal expenses are capital and private in nature, the expenses are not deductible under section 8-1 of the ITAA 1997.