Edited version of private advice

Authorisation Number: 1051974025645

Date of advice: 20 April 2022

Ruling

Subject: Deductions - legal expenses

Question

Can you claim a deduction for legal fees in relation to obtaining a superannuation death benefit payment?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You and another person are both nominated beneficiaries of your family member's superannuation death benefit.

Both you and the other beneficiary were required to sign the documents to release the superannuation death benefit payment from the superannuation fund.

The other beneficiary chose not to sign the relevant documentation to have the superannuation death benefit payment released. This resulted in you being unable to claim your share of the superannuation death benefit payment.

You engaged a legal representative to assist you in releasing your share of the superannuation death benefit payment.

Your legal representative provided services which included meetings, phone calls, drafting letters and reviews of e-mails.

Your legal representative was able to liaise with your family member's superannuation fund and make an exception to release your half of the superannuation death benefit payment.

You were paid your share of the superannuation death benefit from the superannuation fund. You were paid a superannuation lump sum with a taxed element and tax was withheld.

You incurred legal expenses and you wish to claim a deduction for the 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 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 which is sought to be gained by incurring the expenses, that is, whether the legal expenses are incurred for a capital or revenue purpose. The outcome of the legal action does not affect the deductibility of the legal expense rather the nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses.

ATO Interpretive Decision 2001/667 (ATO ID 2001/667) provides 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.

The superannuation death benefit, being a payment of the remainder of a deceased person's superannuation to a nominated beneficiary in your case is a once-off lump sum capital receipt. Therefore, it follows the legal expenses to obtain a lump sum death benefit superannuation payment will also be capital in nature.

You incurred the legal expenses in order to release your share of your family member's superannuation from their superannuation fund. The death benefit superannuation payment that you received is a capital receipt. The payment remains a capital receipt despite the fact that the death benefit payment is assessable.

As the payment you received is capital in nature, the expenses incurred in relation to 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.