Edited version of private advice

Authorisation Number: 1051753831145

Date of advice: 17 September 2020

Ruling

Subject: Legal fees

Question 1

Are you entitled to a deduction in accordance with section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the legal expenses you incurred in pursuit of Total and Permanent Disablement (TPD) benefits from your superannuation funds?

Answer 1

No.

Question 2

Are you entitled to a deduction in accordance with section 8-1 of the ITAA 1997 for the expenses you incurred for the preparation of medical reports in pursuit of TPD benefits from your superannuation funds?

Answer 2

No.

Question 3

Are you entitled to a deduction in accordance with section 8-1 of the ITAA 1997 for the legal expenses you incurred in pursuit of Income protection benefits from your superannuation funds?

Answer 3

No.

Question 4

Are you entitled to a deduction in accordance with section 8-1 of the ITAA 1997 for the services of a financial advisor in relation to the management of your TPD benefits from your superannuation funds?

Answer 4

No.

This ruling applies for the following period:

Year ending 30 June 2021

Year ended 30 June 2020

Year ended 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

You were employed.

You were injured while at work and have been subsequently diagnosed with a permanent disability.

You have been receiving workers compensation to a percentage of your wage.

You engaged legal representation to represent you in a pursuit of Total and Permanent Disablement (TPD) benefits from your superannuation funds.

You were a member of multiple superannuation funds:

You are not the policy holder as the above superannuation funds were entered into group superannuation policies as trustees of the policies.

In pursuit of your claims you incurred legal fees.

You applied for a disbursement funding loan with Legal Disbursement Funding Australia.

For the purposes of the claim, you incurred out of pockets expenses for the preparation of a medical report from a qualified medical practitioner.

You intend to obtain financial advice from a financial advisor in relation to the management of your TPD benefits.

Your TPD benefits have been paid to your superannuation accounts and you are paid regular payments from these funds.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 118-37

Income Tax Assessment Act 1997 section 900-115

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.

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 you incurred legal expenses and medical report expenses in relation to your entitlements under multiple superannuation policies. The superannuation funds provide superannuation products that includes provision of a lump sum payment for permanent disability. Such a payment is capital in nature.

The taxation of superannuation payments is determined by specific legislative provisions rather than section 6-5 of the ITAA 1997, 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.

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

As the legal and medical report 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.

Income protection

Legal expenses are generally deductible if the legal action has a peripheral connection to the taxpayer's income producing activities (Magna Alloys and Research Pty Ltd v. FC of T (1980) 49 FLR 183; (1980) 11 ATR 276; 80 ATC 4542).

When determining the deductibility of costs you incurred pursuing your entitlement to income protection benefits, the fact that you currently are not entitled to the income protection benefits needs to be considered.

A letter from the insurer advises that you are not currently entitled to income protection benefits as you are currently receiving workers compensation payments.

Therefore, the costs that can be directly linked to the income protection benefits were not incurred in generating your assessable income.

Accordingly, the portion of your legal fees that is in relation to the pursuit of your income protection benefits is not an allowable deduction under section 8-1 of the ITAA 1997.

Financial advice

You may claim a tax deduction on fees paid for investment advice provided that the costs are related to advice given which leads to, or is directly associated with, a specific investment which produces assessable income.

Taxation Determination TD 95/60 Income tax: are fees paid for obtaining investment advice an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for taxpayers who are not carrying on an investment business? discusses when we would consider that costs incurred in relation to investments would be considered part of the initial investment establishment or part of the servicing of an established income producing asset.

The costs for the services of a financial advisor in relation to financial advice for the management your current TPD funds are considered to be incurred to establish a new income producing asset.

The costs will not be expenditure incurred in the course of gaining or producing assessable income from an asset as your TPD benefits are not considered an income producing asset.

It is too early in time to be an expense that is part of the income producing process and is considered a preliminary cost and incurred at a point too soon.

The expenses would be associated with putting an income earning investment in place and will have an insufficient connection with earning income from the new asset. It is incidental and relevant to outlaying the price of acquiring and establishing the asset and is associated more closely with the making of the investment so warrants the conclusion that it is capital or capital in nature.

As such a deduction is not allowable for the services of a financial advisor in relation to the financial advice for your TPD benefits from your superannuation funds under section 8-1 of the ITAA 1997.