Edited version of private advice

Authorisation Number: 1052199242483

Date of advice: 30 November 2023

Ruling

Subject: Deduction of legal expenses

Question

Are you entitled to claim a deduction for the legal expenses incurred in relation to pursuing a payment from your superfund under section 8-1 of the Income Tax Assessment Act 1997?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You contacted Lawyer A to pursue a superannuation payment for a claim.

On XX/XX/20XX, you were notified by your superfund that the payment was approved.

On XX/XX/20XX, you incurred legal costs of $XXXX.

On XX/XX/20XX, you received a summary of the amount due from Lawyer A.

You received a payment amount from your superfund for $XXXX.

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.

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.

ATO Interpretative Decision ATO ID 2001/622 Income Tax Legal Expenses - to obtain superannuation payment before retirement age explains that legal expenses incurred in obtaining a superannuation lump sum payment before retirement age are not deductible. The early withdrawal of monies from a taxpayer's superannuation fund is an issue of a private nature. As such, the legal expenses incurred in order to pursue early payment of the superannuation lump sum benefits are also private in nature.

Application to your situation

In your case, you incurred the legal expenses to pursue the claim and the lump sum payment of your superannuation benefit.

The lump sum amount you received from your super fund is your superannuation benefit and/or disability superannuation benefit.

You incurred the legal expenses in order to obtain full entitlement to your superannuation benefit, which is a capital receipt. It follows that the legal expenses you incurred in relation to your claim for full entitlement to your superannuation benefits are capital in nature.

Therefore, as the lump sum amount is capital in nature, and the legal expenses are capital in nature, you cannot claim a deduction for the legal expenses under section 8-1 of the ITAA 1997.