Private ruling: Deduction-legal expenses
Published: November 2011
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to claim a deduction for legal expenses incurred in pursuit of payment under a total and permanent disablement (TPD) insurance policy held with a superannuation fund account? | A1: 


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. | Detailed Reasoning - Employer superannuation contributions: You incurred legal expenses in order to obtain unpaid superannuation benefits from your superannuation fund. Employer superannuation contributions do not form part of your assessable income. Therefore, the legal expenses incurred for this portion of the debt were not incurred in pursuing assessable income and no deduction is available under section 8-1 of the ITAA 1997. | Detailed Reasoning - Total and Permanent Disablement: In addition, you also incurred legal expenses in order to obtain a TPD benefit from your superannuation fund. The payment made is a capital receipt despite the fact that a portion of the lump sum payment is assessable income. 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.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: You were employed and contributed to a superannuation fund. | You were subject to harassment from your former employer and as a result you left your employment. | You took legal action to recover benefits under a TPD policy for unpaid superannuation contributions. | As a result of the legal proceedings the fund settled your claim and paid you a settlement sum. | You incurred legal expenses in relation to the legal proceedings against the fund. | You were not reimbursed for any legal expenses. | You were not required to repay any amounts to any other parties. | You do not have indemnity insurance.