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Edited version of your written advice
Authorisation Number: 1051332724865
Date of advice: 5 February 2018
Ruling
Subject: Legal expenses
Question 1
Are you entitled to a deduction for legal fees incurred in seeking a Total Permanent Disability to access your superannuation before retirement age?
Answer
No
This ruling applies for the following period
Year ending 30 June 20XX
The scheme commences on
1 July 20XX
Relevant facts and circumstances
You were deemed medically unfit for work in xxxx and your employment was terminated.
You engaged legal practitioners to resolve your Total and Permanent Disablement claim to access your superannuation early due to disability.
The matter was resolved and you received Superannuation lump sums.
Your legal practitioners charged you xxxx for resolving the matter
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.
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 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 assessable income.
In your case, you incurred legal expenses in order to obtain your superannuation before retirement age due to your disability. These expenses for the early withdrawal of your superannuation are not sufficiently connected to your assessable income. Furthermore the superannuation benefits are capital in nature. The payments remain capital receipts despite the fact that a portion of the lump sum payments are assessable.
As the payments you received as a result of your legal action are capital in nature, the legal expenses incurred in pursuing your claims 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.