Taxation Determination

TD 93/162

Income tax: employment agreement: are costs associated with an employment agreement deductible to an employee under subsection 51(1) of the Income Tax Assessment Act 1936 (ITAA) where the employee commences employment with a new employer?

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FOI status:

may be releasedFOI number: I 1215918

1. No. Costs incurred by an employee in obtaining employment are not an allowable deduction under subsection 51(1) of the ITAA. See Federal Commissioner of Taxation v. Maddalena , 71 ATC 4161; (1971) 2 ATR 541.

2. The expenditure is incurred by the employee in getting and setting conditions for a new job, not in carrying out the duties as an employee. The expense has been incurred too soon to be considered as having been incurred in the production of assessable income. In addition, the expense is considered to be an initial expense and is therefore of a capital nature. Subsection 51(1) of the ITAA specifically excludes deductions for expenses of a capital nature.

3. Under the Employee Relations Act (Vic) 1992 relationships between employers and employees are governed by employment agreements. Existing award conditions are to be phased out.

4. An employment agreement is a written, legal and binding confirmation of the employer/employee relationship. The agreement covers rates of pay, working conditions, leave entitlements and many other special provisions. Agreements are for a fixed term, not exceeding five years.

Example 1:

James, who has not been employed previously, obtains a job with Retail Pty Ltd in April 1993. They arrange for an employment agreement to be drawn up to comply with the new legislation. James takes his agreement to his lawyer who checks the agreement and suggests some alterations. He sends James an account for $200 for services rendered.

James is not entitled to a deduction as the expense was incurred in gaining a new job and establishing conditions for that new job. It is an initial expense of a capital nature.

Example 2:

Tim leaves Manufacturing Pty Ltd, to join Wholesaling Pty Ltd. The new job is an advancement for him, as he will be paid a much higher salary and has much better long term prospects. They arrange for an employment agreement to be drawn up to comply with the new legislation. Tim takes the agreement to his lawyer who checks it. He sends Tim an account for $150 for services rendered.

Tim is not entitled to a deduction as the expense was incurred in connection with the conditions of a new job. Despite the fact that he obtained an increase in income, the expense is still an initial expense of a capital nature.

Commissioner of Taxation
19 August 1993

Previously issued as Draft TD 93/D162

References

ATO references:
NO MBN AC MS 1492 CPX 17

Related Rulings/Determinations:

TD 93/161
TD 93/163
TD 93/164
TD 93/165

Subject References:
employment agreement

Legislative References:
ITAA 51(1)

Case References:
Federal Commissioner of Taxation v. Maddalena
71 ATC 4161
(1971) 2 ATR 541