Private ruling: Deductibility of Legal Fees
Date of advice: 21 November 2016
Published: March 2017
Ruling period: Year ended 30 June 2016
Date scheme commenced: The scheme has commenced

Ruling: Q1: Are you entitled to claim a deduction for legal expenses incurred in pursuit of payment under a Total and Permanent Disablement insurance policy held with your superannuation fund account? | A1: No

Relevant facts and circumstances: You had an accident. You sought to claim the proceeds of a Total and Permanent Disablement (TPD) insurance policy held in your superannuation fund account. To obtain payment from your superannuation fund you retained the services of a Lawyer. A payment was made as a result of this action, which comprised a taxed element. You incurred legal expenses in relation to the proceedings against the superannuation fund.

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. 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; HCA 34). 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 legal 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. You incurred the legal expenses in order to obtain the TPD benefit from your superannuation fund. The TPD payment was received 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 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.