Private ruling: Legal expenses
Published: September 2014
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 administering a lump sum total and permanent disablement payout? | A1: No.

Relevant facts and circumstances: You received a total and permanent disablement lump sum payment from your superannuation fund which contained a taxable component. You incurred legal fees in order to derive an early release of your total and permanent disablement 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, 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 superannuation lump sum total and permanent disablement payout. The lump sum payment 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.