Are they tax deductible
Scenario:
I have withdrawn a superannuation benefit amounting to $237,800 (superannuation lump sum payment), which includes a taxed element of $71,500 and a tax-free component of $166,353. The taxed element of $71,500 was the assessable income in my 2016 tax return. The payment was mainly due to disability insurance attached to the superannuation fund and required legal representation to get the fund to pay. Legal fees of $34,600 were incurred in processing the above payment.
Are the legal fees fully tax-deductible in my 2016 tax return? Should it be apportioned between taxable and tax-free components?
Explanation:
For legal fees to be deductible, they must be incurred in earning assessable income and must not be capital in character (ITAA 1997 s 8-1). While the fees may be incurred partly in earning assessable income and partly not, they may be full of a capital character. Thus, while it is possible to apportion legal fees between the derivation of assessable and non-assessable income (see Ronpibon Tin NL v FC of T (1949) 78 CLR 47), the entire amount of the legal fees above may be capital in character since they are likely to be one-off and unlikely to recur (see Broken Hill Theatres v FC of T (1952) 85 CLR 423).
Accordingly, the legal fees may not be deductible (ITAA 1997 s 8-1). Moreover, it is likely that the costs cannot be written off since they are not being incurred in the course of carrying on a business (ITAA 1997 s 40-880).
Therefore, the costs may simply be blackhole expenditure (i.e. they cannot be claimed as a deduction or written off by you).