Edited version of private advice

Authorisation Number: 1052312190473

Date of advice: 4 October 2024

Ruling

Subject: Legal expenses - total and permanent disability claim

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 making a claim on your TPD insurance for your work-related injury?

Answer

No.

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

In MM 20XX, you sustained a work-related injury.

In MM 20XX, you engaged lawyers to represent you in making a claim on your TPD insurance through your superannuation fund and to also represent you in your Workers' compensation claim.

You signed two costs agreements and have provided a copy of both agreements:

•         costs disclosure for your TPD insurance claim.

•         costs disclosure agreement for your state-based Workers' compensation claim.

In MM 20XX, Your TPD claim was approved and you received your lump sum TPD monies.

You received an invoice from your lawyers for $ X. On DD MM 20XX, you paid this tax invoice 'Total and Permanent Disability claim - X superannuation fund'. You have provided a copy of this invoice.

Your compensation claim is ongoing.

Contentions

You contend that due to severe limited mental capacity caused by the injury and medications related to the injury, you were not aware that legal costs would be incurred for your TPD claim.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

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, or relate to the earning of exempt income.

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). The nature or character of the legal expenses follows the advantage which is sought to be gained by incurring the expenses, that is, whether the legal expenses are incurred for a capital or revenue purpose. The outcome of the legal action does not affect the deductibility of the legal expense, rather 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. In ATO ID 2001/667, the superannuation payment received by the taxpayer was for the loss of their future earning capacity calculated until their retirement age. The taxpayer received the balance of their lump sum superannuation entitlement in the current income year. 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.

The lump sum payment received qualified as a superannuation benefit. The lump sum superannuation benefit, being a payment for the loss of the taxpayer's earning capacity is a capital receipt. Therefore, as the legal expenses were incurred in gaining a capital sum, they were also of a capital nature and are not deductible under section 8-1 of the ITAA 1997

Application to your circumstances

In your case, you incurred legal expenses of $ X to pursue your TPD claim with your superannuation fund. Your claim for TPD was approved and you received your disability superannuation benefit. This lump sum payment which represents the loss of your future earning capacity calculated until your retirement age is a capital receipt. Therefore, the legal expenses you incurred are capital in nature.

Consequently, no deduction is allowable under section 8-1 of the ITAA 1997 for the legal expenses incurred in order to obtain the superannuation benefit.