Edited version of private advice

Authorisation Number: 1051983920857

Date of advice: 20 May 2022

Ruling

Subject: Deductions

Question

Are the legal expenses an allowable deduction?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You received a total and Permanent disability benefit in a previous year.

The payment consisted of multiple components.

You incurred legal fees.

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.

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 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.

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.

You incurred legal expenses in order to obtain a benefit from your superannuation fund.

Such a superannuation lump sum is a capital receipt.

The taxation of superannuation payments is determined by specific legislative provisions. Superannuation capital payments, or parts of such payments, 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.

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

As the benefit received is capital in nature, the expenses incurred in relation to your claim are also capital in nature. Consequently, no deduction is allowable under section 8-1 of the ITAA 1997 for the legal expenses you incurred in relation to your disability benefit as expenditure of a capital nature is expressly excluded under section 8-1 of the ITAA 1997.