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

Ruling: Q1: Are you entitled to claim a deduction for legal expenses incurred in pursuit of payment under a Total and Permanent Disablement (TPD) benefit from your superannuation fund? | A1: No

Relevant facts and circumstances: You engaged legal practitioners to represent you in seeking to claim payment of a TPD benefit from your superannuation fund. In 2014, you received notice from your lawyers to advise the claim was successful and that you have chosen to be paid the disability benefit, rather than roll it over into a roll-over fund. This letter confirmed an amount was deposited into your bank account, being the remaining balance of your benefit, after payment of professional legal costs.

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 the legal expenses in order to obtain a TPD benefit from your superannuation fund. The payment was 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 as a result of your legal action is capital in nature, the expenses incurred in pursuing your claim 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.