Private ruling: Legal expenses
Date of advice: 29 July 2015
Published: July 2014
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for legal expenses incurred in obtaining a superannuation lump sum payment for total and permanent disability? | A1: No

Relevant facts and circumstances: You launched legal action to obtain a total and permanent disability payment from your superannuation fund. You were successful in this action and received a taxable lump sum payment. You incurred legal expenses in order to receive this lump sum payment.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1

Reasons for decision: Summary: Section 8-1 of the 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. In determining whether a deduction for legal expenses is allowed under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered ( Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634); [1946] HCA 34. The nature or character of the legal expenses follows the advantage which is sought to be gained by incurring the expenses. If the advantage to be gained is of a capital nature then the expenses incurred in gaining the advantage will also be of a capital nature. 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 the assessable income of the taxpayer The lump sum superannuation benefit, being a payment for the loss of your earning capacity, is a capital receipt. You incurred the legal expenses in order to obtain the superannuation benefit. Although the taxable component of the superannuation benefit is included in your assessable income, the superannuation benefit retains its character as a capital receipt. As the legal expenses were incurred in gaining a capital sum they will also be of a capital nature and are therefore not deductible under section 8-1 of the ITAA 1997.