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Edited version of your written advice
Authorisation Number: 1051389768248
Date of advice: 29 June 2018
Ruling
Subject: Legal expenses
Question1
Are you entitled to a deduction for the full amount of your legal expenses ($X)?
Answer
No
Question2
Are you entitled to a deduction for the portion of the legal expenses relating to the taxable death benefit lump sum you received?
Answer
Yes
Section 8-1 of the Income Tax Assessment Act 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 your case a portion of the legal expenses were incurred in relation to obtaining a taxable lump sum death benefit payment. As the payment is considered revenue in nature and assessable the legal expenses in relation to your lump sum death benefit are therefore deductible under section 8-1 of the ITAA 1997.
Further Information
Taxation Determination 93/29 discusses the apportionment of legal expenses. Where legal expenses are incurred in relation to proceedings that relate both to amounts that are revenue in nature as well as amounts which are capital in nature, there must be some fair and reasonable assessment of the extent of the relation of the outlay to assessable income.
Where the solicitors account is itemised, one reasonable basis for apportionment would be the time spent involving the revenue claim, relative to the time spent on the capital claim.
If the solicitors account is not itemised, a possible basis for apportionment would be either a reasonable costing of the work undertaken by the solicitor in relation to the revenue claim, or, where this is not possible, an apportionment on the basis of the monetary value of the revenue claim relative to the capital claim.
This ruling applies for the following period:
Period ending 30 June 201Y
The scheme commences on:
1 July 201X
Relevant facts and circumstances
Your spouse passed away in xxxx.
Findings from the Coroner’s Inquest xxxxx found there to be negligence.
You engaged the legal firm as your legal representative.
You received an offer on xxxx that you accepted.
You received exempt and taxable lump sum payments in the 201Y financial year.
You reported the taxable lump sum death benefit in your 201Y tax return.
You incurred legal expenses of $xxxx in undertaking the legal action.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1