Private ruling: Deduction for legal expenses
Date of advice: 11 November 2019
Published: January 2020
Ruling period: Year ended 30 June 2019
Date scheme commenced: 1 July 2018

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 suffered a permanent work related injury and you are unable to work in your previous roles. You engaged legal practitioners to assist you in seeking to claim payment of TPD benefits from your superannuation fund. Your claim was successful and you received of $X in the 2019 financial year. This comprised a tax free component of $Y and a taxable component of $Z. You incurred a total of $W in 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. 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.