Edited version of private advice

Authorisation Number: 1051589056243

Date of advice: 02 October 2019

Ruling

Subject: Legal expenses - superannuation lump sum

Question

Are you entitled to a deduction for any of your legal expenses incurred?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2019

The scheme commenced on

1 July 2018

Relevant facts

You suffered an injury that prevents you from further work.

You engaged a legal firm to make a claim from your total and permanent disablement (TPD) insurance that was paid by your superannuation fund.

As a result, you received a superannuation lump sum, less withholding tax. The amount had a taxed element and a tax-free component.

You incurred 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.

For legal expenses to constitute an allowable deduction, it must be shown that they are incidental or relevant to the production of the taxpayer's assessable income. Also, 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 to be gained is of a capital nature, then the expenses incurred in gaining the advantage will also be of a capital nature.

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.

In your case you incurred legal expenses in relation to your TPD claim and entitlements under your superannuation fund.

The taxation of superannuation payments is determined by specific legislative provisions rather than section 6-5 of the ITAA 1997, which is the general provision which assesses ordinary income. Superannuation capital payments, or parts of such payments, which would not fall under section 6-5 of the ITAA 1997 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.

You incurred legal expenses in relation to obtaining your TPD payout and payment from your superfund. The payment received was a lump sum superannuation payment as stated on your PAYG payment summary. The payment was a lump sum received because of your permanent disability and is regarded as a capital receipt.

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

As the legal expenses were incurred in gaining a capital sum they will also be of a capital nature and are therefore not deductible under section 8-1 of the ITAA 1997.