ATO Interpretative Decision

ATO ID 2002/902

Income Tax

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Issue

Can a taxpayer claim a deduction for damages paid for a breach of employment contract under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. The taxpayer cannot claim a deduction for damages paid for a breach of employment contract under section 8-1 of the ITAA 1997 because the payment is not related to the earning of assessable income.

Facts

The taxpayer undertook a self-education course that was sponsored by the taxpayer's employer. The terms of the sponsorship contained in the employment contract were that the:

•

employer pays all expenses related to the self-education course

•

the taxpayer continues employment with the employer for an agreed period after the completion of the self-education course; and

•

the taxpayer repays the self-education expenses for not meeting the terms of the contract.

The taxpayer did not continue employment with the employer for the agreed period after completion of the self-education course.

The taxpayer's employer requested payment for damages, being the self-education expenses paid on behalf of the taxpayer and the taxpayer complied with the request.

Reasons for Decision

Section 8-1 of the ITAA 1997 allows a deduction for all losses or outgoings to the extent to which they are incurred in gaining or producing assessable income, except to the extent that they are outgoings of a capital, private or domestic nature.

The courts have considered the meaning of 'incurred in gaining or producing assessable income'. In Ronpibon Tin NL & Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; [1949] HCA 15; (1949) 4 AITR 236; (1949) 8 ATD 431 the High Court stated that:

'For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing assessable income it must be incidental and relevant to that end. The words "incurred in gaining or producing assessable income" mean in the course of gaining or producing such income.'

The expenditure must therefore be related to the production of assessable income.

The payment for damages (being repayment of self-education expenses) to the employer by the taxpayer is not related to the earning of assessable income. The payment represents expenditure incurred by the taxpayer for breaching the terms of the employment contract. Therefore, the expenditure for damages cannot be said to have been incurred as a self-education expense.

Accordingly, the damages paid for breach of employment contract in relation to the self-education expense claim is not an allowable deduction under section 8-1 of the ITAA 1997 as it was not incurred in gaining or producing assessable income.

Amendment History

Year of income:  Year ended 30 June 1998 Year ended 30 June 1999

Legislative References:
Income Tax Assessment Act 1997
   section 8-1

Case References:
Ronpibon Tin NL & Tongkah Compound NL v. Federal Commissioner of Taxation
   (1949) 78 CLR 47
   [1949] HCA 15;
   (1949) 4 AITR 236
   (1949) 8 ATD 431

Other References:
CDS 10261

Keywords
Self-education expenses
Deduction and expenses
Damages expenses
Breach of contract

Siebel/TDMS Reference Number:  SYD63392.PBV; 1-6EV49QW

Business Line:  Small Business/Individual Taxpayers

Date of publication:  16 September 2002

ISSN: 1445-2782