Private ruling: Legal expenses for TPD lump sum
Date of advice: 17 October 2017
Published: March 2018
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Are the legal services expenses incurred in establishing the legitimacy of a claim for a Total and Permanent Disablement (TPD) insurance payout which is held in the superannuation fund’s name an allowable deduction? | A1: No. | Q2: Are the legal services expenses incurred in facilitating the receipt of the approved claim for a TPD insurance payout which is held in the superannuation fund’s name an allowable deduction? | A2: No.

Relevant facts and circumstances: You were involved in an accident and as a result, left unable to work on a permanent basis. You then sought to make a claim on your TPD insurance held in your superannuation funds name. You used the services of a legal firm firstly to assist you to establish the legitimacy of your claim for TPD insurance, and subsequently to facilitate the receipt and transfer of the resulting payouts to your bank account. You received two payouts, less legal fees.

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, 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 fund. Even though the legal expenses were split between initially establishing the legitimacy of your claim for TPD, and once the claim was approved, facilitating the receipt of the claim for the TPD payout, these two actions had the one motivating factor, that of obtaining your TPD payout. These payments were for the loss of your earning capacity and therefore considered capital receipts. The payments remain capital receipts even where a portion of the lump sum payments may be 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.

The advice in the Register has been edited and may not contain all the factual details relevant to each decision. Do not use the Register to predict ATO policy or decisions.