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Edited version of your written advice
Authorisation Number: 1051452213587
Date of advice: 8 November 2018
Ruling
Subject: Deductibility of legal expenses
Question
Can you claim a deduction for legal expenses incurred in securing full release of your superannuation as a lump sum disability benefit when you ceased work due to ill health?
Answer
No.
This ruling applies for the following period:
Year ended 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You retired from the workforce due to ill health and applied for the release of your superannuation as a lump sum disability benefit.
You engaged a law firm to assist you with this process.
Your claim was successful and you obtained full release of your entitlements.
You incurred approximately $XXX in legal expenses.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Summary
The lump sum payment you received was for the loss of your earning capacity and is a capital receipt. Consequently, no deduction is allowable for the legal expenses you incurred as expenditure of a capital nature is expressly excluded.
Detailed reasoning
Section 8-1 of the Income Tax Assessment Act 1997 (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 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.
You incurred the legal expenses in order to obtain the release of your superannuation as a lump sum disability benefit. The lump sum payment was received for the loss of your earning capacity and is a capital receipt. The payment remains a capital receipt despite the fact that a portion of the lump sum payment is assessable.
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.