Private ruling: Deduction - Legal expenses - TPD lump sum superannuation payments
Date of advice: 26 September 2016
Published: November 2016
Ruling period: Year ending 30 June 2016
Date scheme commenced: 01 July 2015

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 work related injury. You engaged solicitors 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 the following: • $xxxxx tax free element, and • $xxxx taxed element • $xxxx tax paid. Your solicitor 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 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. ETP's are subject to special tax treatment that may result in some or all of the amounts being included in assessable income. However, 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 TPD benefits from your superannuation funds. 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.