Private ruling: Deduction - Legal expenses – TPD lump sum superannuation payments
Date of advice: 26 July 2017
Published: November 2017
Ruling period: Year ending 30 June 2017
Date scheme commenced: 01 July 2016

Ruling: Q1: Are the legal expenses incurred in pursuit of payment under a Total and Permanent Disablement (TPD) benefit from superannuation funds an allowable deduction? | A1: No.

Relevant facts and circumstances: You suffer from an illness and are no longer able to work. You engaged legal practitioners to resolve your Total and Permanent Disablement Claim. The claim involved both an insurance payout and a Superannuation Lump Sum. The matter was successfully resolved and you received a payment comprising both taxed and tax-free elements Your legal practitioners charged you fees for resolving the matter.

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

Reasons for decision: Summary: Section 8-1 of the 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) 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. The fact that a capital payment is specifically brought to account as assessable income will not change the nature of the payment. An amount that is capital in nature will remain capital notwithstanding that it is specifically included in assessable income. In your case, you incurred legal expenses in order to obtain Total and Permanent Disability (TPD) benefits from your superannuation fund. These payments were for the loss of your earning capacity and therefore are 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 legal 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.