ATO Interpretative Decision
ATO ID 2001/548 (Withdrawn)
Income Tax
Repayment of part of an assessed Australian Defence Force retention bonusFOI status: may be released
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Since the enactment of section 59-30 of the ITAA 1997, this ATO ID no longer reflects the ATO view on this matter.This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is the repayment of a retention bonus by a taxpayer who leaves the Australian Defence Force (ADF) early, excised from the taxpayer's assessable income under section 170 of the Income Tax Assessment Act 1936 (ITAA 1936) in the year that the bonus was assessed?
Decision
Yes, the repayment of the retention bonus by a taxpayer who leaves the ADF early is excised from the taxpayer's assessable income under section 170 of the ITAA 1936 in the year that the retention bonus was assessed.
Facts
The taxpayer was a member of the ADF. The taxpayer was offered an amount (referred to as a retention bonus) to sign on for another five years of service. Under the terms of the contract if an ADF member resigned before the end of that five year period they were required to repay, on a pro rata basis, that part of the retention bonus relating to the period of service that they did not complete.
The taxpayer signed up for the retention bonus. The retention bonus was included on their group certificate (now called a payment summary) and disclosed as assessable income in the year of receipt. One year into the contract the taxpayer resigned from the ADF, and was required to repay four-fifths of the retention bonus. The taxpayer entered into an arrangement to repay the amount due.
Reasons for Decision
A retention bonus is a payment that is made subject to certain conditions including the condition that if the recipient fails to serve the required time, some or all of the payment may be required to be repaid.
The retention bonus is assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) in the year in which it is received ((1958) 9 TBRD Case J20; 7 CTBR (NS) Case 130; and (1958) 9 TBRD Case J60; 8 CTBR (NS) Case 50). The fact that the receipt may have to be repaid if certain events subsequently occur does not affect the character of the receipt (Case A59 69 ATC 334; 15 CTBR (NS) Case 34).
The repayment of the retention bonus is not an allowable deduction under the general deductions provisions in section 8-1 of the ITAA 1997 as it is not incurred in the course of earning or deriving assessable income ((1958) 9 TBRD Case J20; 7 CTBR (NS) Case 130; and (1958) 9 TBRD Case J60; 8 CTBR (NS) Case 50). The repayment is an amount paid for breach of contract ((1958) 9 TBRD Case J60; 8 CTBR (NS) Case 50; and (1963) 14 TBRD Case P20; 11 CTBR (NS) Case 58).
The retention bonus was therefore correctly assessed in the year of receipt, and the taxpayer is not entitled to claim a deduction in the year of repayment of the bonus.
However, the Assistant Treasurer announced on 1 August 2001 a proposed amendment to the taxation law to allow a taxpayer who has to repay assessable income to seek an amended assessment for the year in which that income was originally included in their tax return. The amendment will not apply to repayments that are an allowable deduction or where the recipient is otherwise compensated for the amount to be repaid (for example, where the person receives a personal injury compensation amount from which sickness benefits have to be repaid). The amendment applies to the 1996-97 and later years of income.
The Commissioner will exercise his administrative powers to give immediate effect to the Government's announcement.
Taxation Ruling IT 2623 gives effect to the Commissioner's decision by allowing the amount of retention bonus which is repayable to be excluded from the assessable income of the year in which the bonus was originally assessed. This is subject to meeting the requirement of IT 2623A (an addendum to IT 2623) that the amount has been repaid, or an arrangement is in place to repay it.
A taxpayer may seek an amendment of the tax assessment in which the retention bonus was assessed, subject to the 4 year time limit for amendments set by subsection 170(3) of the ITAA 1936. For the 2000-01 and future income years, the time limit is 2 years if the taxpayer is a shorter period of review taxpayer.
The taxpayer has entered an arrangement to repay the amount due and is therefore able, subject to the statutory time limits, to excise the amount from the assessable income of the year in which it was assessed.
Date of decision: 5 October 2001
Legislative References:
Income Tax Assessment Act 1936
section 170
subsection 170(3)
section 6-5
section 8-1
Case References:
Case J20
(1958) 9 TBRD 109
7 CTBR (NS) 838 Case J60
(1958) 9 TBRD 308 Case 50
8 CTBR (NS) 250 Case P20
(1963) 14 TBRD 97 Case 58
11 CTBR (NS) 355 Case A59
69 ATC 334 Case 34
15 CTBR (NS) 219
Related Public Rulings (including Determinations)
IT 2623
ATO ID 2001/38 (Withdrawn) ATO ID 2001/552
Other References:
Assistant Treasurer's Press Release No.34, 1 August 2001
Keywords
Amendment of assessments
Deductions and expenses
Employee allowances
Employee bonuses
Employment contracts
Salary & wages income
Repayment
ISSN: 1445-2782
| Date: | Version: | |
| 5 October 2001 | Original statement | |
| You are here | 1 December 2003 | Archived |