Edited version of private advice

Authorisation Number: 5010073794300

Date of advice: 19 May 2021

Ruling

Subject: Deductions - legal expenses

Question

Are you entitled to claim a deduction for the legal expenses incurred in relation to the Claims under section 8-1 of the Income Tax Assessment Act 1997?

Answer

No.

This ruling applies for the following period periods:

Income year ending 30 June 20XX.

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You became ill while you were overseas and experienced ongoing medical issues which have made you unfit for work.

You hold several super accounts with the one super fund and decided to lodge claims (the Claims) in relation to your Total Permanent Disability (TPD) cover.

Your claims were refused, and you engaged the services of a legal firm to pursue the Claims, incurring legal expenses.

Your claims were successful, and you received a lump sum amount in relation to each of the super accounts.

You were not entitled to receive a super pension in relation to your super fund during the period covered by this ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Deduction for legal expenses incurred in relation to superannuation lump sum amounts

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; (1946) HCA 34). The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses.

ATO Interpretative Decision ATO ID 2001/667 Income tax Legal expenses - to recoup full entitlement to a superannuation lump sum payment explains that 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. Whether a capital payment is specifically brought to account as assessable income does 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.

ATO Interpretative Decision ATO ID 2001/622 Income Tax Legal Expenses - to obtain superannuation payment before retirement age explains that legal expenses incurred in obtaining a superannuation lump sum payment before retirement age are not deductible. The early withdrawal of monies from a taxpayer's superannuation fund is an issue of a private nature. As such the legal expenses incurred in order to pursue early payment of the superannuation lump sum benefits are also private in nature.

Application to your situation

In your case you experienced a medical issue and are unfit to return to work. You made claims in relation to your super accounts that were rejected. You incurred the legal expenses to pursue the claims and the lump sum payments of your superannuation benefit.

The lump sum amount you received in relation to your super accounts, which were sourced mainly from the insurance payments through the super fund, are your superannuation benefits and/ or disability superannuation benefits.

The lump sum superannuation benefit that you received is a capital receipt. You are not eligible to a superannuation pension, so no amount of the lump sum payment is of a revenue nature. Although the taxable component of the TPD benefit is included in your assessable income, it retains its character as a capital receipt.

You incurred the legal expenses in order to obtain full entitlement to your superannuation benefits, which are capital receipts. It follows that the legal expenses you incurred in relation to your claims for full entitlement to your superannuation benefits are capital in nature.

Therefore, as the lump sum amounts are capital in nature, and the legal expenses are capital in nature, you cannot claim a deduction for the legal expenses under section 8-1 of the ITAA 1997.

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