Edited version of private advice

Authorisation Number: 1052317153581

Date of advice: 14 October 2024

Ruling

Subject: Deductions - legal expenses

Question

Are you entitled to a deduction pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of your legal expenses incurred to make a claim for Total and Permanent Disability Insurance?

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

You were injured and obtained a disability.

You engaged a lawyer to claim a 'Superannuation lump sum payment' for Total and Permanent Disability (TPD) insurance, through a Super Fund (the Super Fund).

The claim was successful resulting in a payout from your TPD insurance.

On XX XX 20XX, your lawyer provided a statement of account detailing the total amount of TPD you would receive was $XXX,XXX.

The statement of account details that you incurred legal expenses in the amount of $XX,XXX.

On XX XX 20XX, your lawyer advised in writing that your TPD claim was paid to you. The lawyer confirmed the benefit in the amount of $XXX,XXX had been transferred to your bank account.

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, 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 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 superannuation 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 for 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.

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.

Application to your circumstances

In your case, you incurred the legal expenses to pursue the claim and obtain a Total and Permanent Disability (TPD) payment from your superannuation fund. As stated above in ATO ID 2001/667,to recoup full entitlement to superannuation paymentexplains 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.

Consequently, no deduction is allowable for the legal expenses you incurred in relation to your disability benefit. The advantage sought was capital in nature, your legal expenses follow the advantage sought and you cannot claim a deduction under section 8-1 of the ITAA 1997.