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Edited version of your written advice
Authorisation Number: 1012698034981
Ruling
Subject: Legal expenses
Question
Can you claim a deduction for legal expenses incurred in securing early release of your superannuation and a total & permanent disablement insurance payment?
Answer
No
This ruling applies for the following period(s)
Income year ended 30 June 2014
The scheme commences on
1 July 2013
Relevant facts and circumstances
You engaged solicitors to resolve your Super and Permanent Disablement Claim. The claim involved both and insurance payout and an early release of your superannuation.
The matter was successfully resolved and you received the following:
• $X being early access to your super account balance, and
• $Y being an insurance payout from your total and permanent disablement insurance payment.
Your solicitor charged you fees of $Z for resolving the matter.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1
Reasons for decision
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, or relate to the earning of exempt 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) 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 is of a capital or private nature, then the expenses incurred in gaining the advantage will also be of a capital or private nature. An amount that is capital in nature will remain capital notwithstanding that it is specifically included in the assessable income of the taxpayer.
Insurance Payout
You incurred the legal expenses in order to obtain a payout of your total and permanent disablement insurance cover under Australian Super. The lump sum payment was received for the loss of your earning capacity and is a capital receipt.
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 you incurred as expenditure of a capital nature is expressly excluded.
Early Access to Superannuation
The legal expenses were not incurred by the taxpayer in asserting their right to the superannuation payment but rather for early withdrawal of the monies from the taxpayer's superannuation fund. The early withdrawal of monies from the taxpayer's superannuation fund is an issue of a private nature. There is an insufficient nexus between incurring the legal expenses and the gaining of assessable income. The legal expenses are also private in nature and therefore not deductible under section 8-1 of the ITAA 1997.