Edited version of private advice

Authorisation Number: 1052157593972

Date of advice: 24 August 2023

Ruling

Subject: Legal expenses

Question

Can you deduct legal expenses incurred in relation to your permanent disability insurance claim through your superannuation fund under section 8-1 of the Income Tax Assessment Act 1997?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commence on:

1 July 20XX

Relevant facts and circumstances

You engaged a solicitor to represent you in an ongoing case regarding work cover and your former employer.

Your solicitor asked you whether you wanted them to apply for a permanent disability insurance claim through your superannuation fund. You agreed to have them proceed with the claim.

Your solicitor was successful and you received a TPD lump sum from your super fund with a taxed and untaxed element.

You incurred 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 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] HCA 34). 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 receipt, the legal costs will not be deductible.

Applications to your circumstances

In your case, you incurred the legal expenses in order to obtain a Total and Permanent Disablement 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 even though 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 disability 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.