Edited version of your written advice

Authorisation Number: 1012969347619

Date of advice: 16 February 2016

Ruling

Subject: Legal expenses

Question 1

Are you entitled to a deduction for your legal expenses incurred in relation to your income protection policy payment?

Answer

Yes.

Question 2

Are you entitled to a deduction for your legal expenses incurred in relation to your lump sum benefit?

No.

This ruling applies for the following period

Year ended 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts

You received a payment under your income protection insurance policy.

You sought legal advice in relation to lodging your claim. You incurred legal expenses.

You also sought legal advice in relation to getting your payment under your disability insurance policy. The disability benefit was paid which consisted of a taxed element and tax free component. You incurred further legal expenses.

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 a loss or an outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature.

In determining whether a deduction for legal expenses is allowable 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) 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 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.

In Tax Determination TD 93/29 Income tax: if an employee incurs legal expenses recovering wages paid by a dishonoured cheque, are these legal expenses an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997? the Commissioner states that legal expenses incurred by an employee in recovering unpaid wages are deductible under section 8-1 of the ITAA 1997, as the expenses are directly incurred in the process of deriving payments of a revenue nature that are assessable. However, if legal action is not a claim for a revenue item such as wages, but instead is a claim for a capital payment, the legal costs will not be deductible.

Legal expenses incurred in recovering salary or wages are considered to be of a revenue nature and therefore deductible under section 8-1 of the ITAA 1997.

In your case you incurred legal expenses in relation to receiving an income protection insurance payment. As these payments represent a replacement of your salary and wages, they are considered to be revenue in nature and assessable. The associated legal expenses incurred in relation to your claim for income protection payments relates sufficiently to the earning of your assessable income and are therefore deductible under section 8-1 of the ITAA 1997.

You also incurred the legal expenses in order to obtain a Disablement benefit from your superannuation fund. Such a superannuation lump sum is a capital receipt.

The taxation of superannuation payments is determined by specific legislative provisions. Superannuation capital payments, or parts of such payments, may nevertheless be included in assessable income by those specific legislative provisions.

The fact that a capital payment is specifically brought to account as assessable income will not change the nature of the payment. That is, an amount that is capital in nature will remain capital notwithstanding that it is specifically included as assessable income.

Although the taxed element of your superannuation benefit is included in your assessable income, the superannuation benefit retains its character as a capital receipt.

As the disability benefit received is capital in nature, the expenses incurred in relation to 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 in relation to your disability benefit as expenditure of a capital nature is expressly excluded under section 8-1 of the ITAA 1997.