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Edited version of private advice
Authorisation Number: 1051653402784
Date of advice: 07 April 2020
Ruling
Subject: Deduction for legal expenses - total and permanent disablement benefit
Question
Are you entitled to a deduction for the legal expenses you incurred in pursuit of Total and Permanent Disablement (TPD) benefits from your superannuation funds?
Answer
No
This ruling applies for the following period
Year ended 30 June 2018
The scheme commences on
1 July 2017
Relevant facts and circumstances
You were injured at work.
You incurred legal expenses pursuing TPD benefits from your superannuation funds.
Your legal action was successful and you received superannuation lump sum payments which consisted of both taxable and tax free components.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1
Reasons for decision
You can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income except where the loss or outgoing is capital or private in nature (section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)).
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 sought is of a capital nature, then the expenses incurred in gaining the advantage are also of a capital nature. The fact that a capital payment is specifically brought to account as assessable income does not change the nature of the payment. An amount that is capital in nature remains capital notwithstanding that it is specifically included as assessable income.
In your case, the lump sum (TPD) superannuation benefit you were pursuing, being a payment for the injury or for the loss of earning capacity is a capital receipt. Although the taxable component of the TPD benefit is included in your assessable income, it retains its character as a capital receipt.
As you incurred legal expenses in pursuit of a capital receipt the legal expenses are also of a capital nature. As such, you are not entitled for your legal expenses under section 8-1 of the ITAA 1997 as expenditure of a capital nature is expressly excluded.