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Edited version of your private ruling
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Ruling
Subject: Legal expenses
Question
Are you entitled to claim a deduction for legal expenses incurred in obtaining superannuation benefits?
Answer: No
This ruling applies for the following periods
Year ended 30 June 2011
Year ending 30 June 2012
The scheme commences on
1 July 2010
Relevant facts and circumstances
Your son died in 2008.
You have incurred legal expenses to obtain lump sum superannuation death benefits.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 6-10
Income Tax Assessment Act 1997 Section 10-5
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.
Ordinary income has generally been held to include 3 categories, namely, income from rendering personal services, income from property and income from carrying on a business.
Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income.
Section 10-5 of the ITAA 1997 includes superannuation death benefits as statutory income.
Section 8-1 of the 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) 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 to be gained is of a capital nature then the 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 have incurred the legal expenses in order to obtain the superannuation lump sum payments. Although the lump sum payments will be included in your assessable income, they are capital in nature.
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.