Private ruling: Legal expenses
Published: February 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a deduction for the legal expenses incurred in obtaining superannuation lump sum benefits? | A1: No. | Q2: Are you entitled to a partial deduction for the legal expenses to the extent they were incurred in obtaining the taxable components of the superannuation lump sum benefits? | A2: No.

Relevant facts and circumstances: You were an employee. You were diagnosed with a medical condition. Your condition deteriorated to such a degree that you were unable to work and you left your employment. You engaged a legal firm to handle your claim for Total & Permanent Disability from your superannuation funds. The claims were successful and you received superannuation lump sum payments containing taxable components.

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. You incurred the legal expenses in order to obtain a total and permanent disability lump sum payment. The lump sum payment was received for the loss of your earning capacity and is a capital receipt. The payment remains a capital receipt despite the fact that a portion of the lump sum payment is assessable. As the payment you received is capital in nature, the expenses incurred in securing that payment 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.