Edited version of private advice

Authorisation Number: 1052169156092

Date of advice: 18 September 2023

Ruling

Subject: Deductions - legal expenses

Question

Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for legal expenses you incurred to obtain a superannuation lump sum before retirement age?

Answer

No.

This ruling applies for the following period:

For the income year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are X years of age.

You are a member of an industry superannuation fund.

You sustained an illness or injury and were unable to continue working in your previous capacity.

You wanted to have access to your superannuation lump sum payment before you reached retirement age.

You incurred legal expenses in order to pursue the early payment of the superannuation lump sum.

You received a superannuation lump sum payment during the relevant income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 paragraph 8-1(2)(a)

Income Tax Assessment Act 1997 paragraph 8-1(2)(b)

Reasons for decision

Detailed reasoning

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 Interpretive 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. Where a capital payment is specifically brought to account as assessable income, the nature of the payment received will not change. 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 lump sum benefit, being a payment for the loss of the taxpayer's earning capacity into the future, is a capital receipt. The taxpayer incurred the legal expenses in order to obtain the superannuation lump sum before retirement age. Although the taxable component of the superannuation lump sum is included in the taxpayer's assessable income, the superannuation benefit retains its character as a capital receipt. Paragraph 8-1(2)(a) of the ITAA 1997 excludes general deductions which are capital, or of a capital nature.

ATO Interpretive Decision ATO ID 2001/622 Income Tax Legal Expenses - to obtain superannuation payment before retirement age explains that legal expenses incurred in obtaining superannuation payment before retirement age are not deductible. The early withdrawal of monies from the taxpayer's superannuation fund is an issue of a private nature. There is an insufficient nexus between incurring the legal expenses and the gaining of assessable income. Paragraph 8-1(2)(b) of the ITAA 1997 excludes general deductions of a private or domestic nature.

Application to your situation

As your legal expenses were incurred in obtaining a capital lump sum payment before retirement age, they will also be of a capital (and private) nature and therefore cannot be deducted from your assessable income.