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Edited version of private ruling
Authorisation Number: 1011539586785
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Ruling
Subject: Legal expenses
1. Are you entitled to a deduction for legal expenses relating to your income protection claim?
Yes.
2. Are you entitled to a deduction for legal expenses relating to your superannuation lump sum payment?
No.
This ruling applies for the following period
Year ended 30 June 2010
The scheme commenced on
1 July 2009
Relevant facts
You incurred legal expenses relating to your successful claim under your income protection policy.
You also incurred legal expenses relating to your superannuation lump sum payment.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 301-35
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a person to claim a loss or outgoing that is incurred in gaining or producing assessable income so long as the loss or outgoing is not 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) 8 ATD 190; (1946) 3 AITR 436. The nature or character of the legal expenses follows the advantage that 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.
Income protection claim
You incurred legal expenses in order to obtain the income protection insurance payments resulting in you gaining assessable income. Thus, there is a clear connection between the assessable income and the expense. Accordingly, you are entitled to a deduction for legal expenses.
Superannuation lump sum
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 Superannuation lump sum is a capital receipt.
You incurred the legal expenses in order to obtain the lump sum. Although taxed element of the lump sum will be included in your assessable income under section 301-35 of the ITAA 1997, the lump sum 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.
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