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Edited version of your written advice
Authorisation Number: 1051459097467
Date of advice: 27 November 2018
Ruling
Subject: Superannuation disability benefit and legal fees
Question
Are you entitled to claim a deduction for legal expenses incurred in fighting your superannuation total and permanent disability (TPD) insurance payment that was originally denied?
Answer
No
This ruling applies for the following period:
Year ending June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You were a member of Construction and Building Unions Superannuation (CBUS) fund.
You attempted to make a claim for TPD but were unsuccessful.
You engaged lawyers to object to the finding.
A PAYG payment summary for a superannuation lump sum shows that a payment was made by CBUS to you. The payment comprised of:
● Taxable component – tax element
● Tax-free component
● Total tax withheld
In a letter, CBUS sent you a cheque which represented the disability benefit received.
You incurred legal costs for over $XYZ in receiving the payment.
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 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 assessable 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) 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 the 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.