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Edited version of private ruling
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Ruling
Subject: legal expenses
Are you entitled to a deduction for legal expenses incurred in pursuit of a superannuation lump sum payment for total and permanent disablement?
No.
This ruling applies for the following periods:
Year ended 30 June 2010
The scheme commences on:
1 July 2009
Relevant facts and circumstances
You were successful in pursuing a claim for total and permanent disability.
As a result of your claim, you received an amount of assessable income as a superannuation lump sum payment.
You incurred legal expenses in pursuing your claim.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1.
Reasons for decision
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) 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 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.
You incurred legal expenses in order to obtain a total and permanent disablement payment from your superannuation fund. The amount was assessable income. The payment was for the loss of your earning capacity and is a capital receipt.
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 as expenditure of a capital nature is expressly excluded.