Edited version of private advice

Authorisation Number: 1052039570693

Date of advice: 30 September 2022

Ruling

Subject: Deductions - legal expenses

Question

Are you entitled to claim a deduction for the legal expenses incurred in relation to the Claim under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

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 engaged a legal firm to lodge and handle your Claim with your superannuation fund.

The letter from your superannuation fund stating that you requested the early release of your superannuation benefit, and the Trustee of the fund approved your request.

You received a lump sum payment from your superannuation fund contained taxable component and tax-free component.

Tax was withheld from the lump sum payment.

You incurred legal expenses.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Deduction for legal expenses incurred in relation to superannuation lump sum payments

Section 8-1 of the 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.

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) HCA 34). The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses.

ATO Interpretative Decision ATO ID 2001/667 Income tax Legal expenses - to recoup full entitlement to a superannuation lump sum payment explains that 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. Whether 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 will remain capital notwithstanding that it is specifically included in the assessable income of the taxpayer.

Application to your situation

In your case, you incurred legal expenses in order to obtain a superannuation lump sum payment. The lump sum payment is a capital receipt. The payment remains a capital receipt despite the fact that a portion of the lump sum payment is assessable.

As the payment you received is capital in nature, the expenses incurred in securing that 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.