ATO Interpretative Decision

ATO ID 2003/1087

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is a taxpayer, a professional sportsperson, entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for a fine imposed by their employer?

Decision

No. The taxpayer, a professional sportsperson, is not entitled to a deduction under section 8-1 of the ITAA 1997 for a fine imposed by their employer because there is not a sufficient nexus between the outgoing and the earning of the assessable income.

Facts

The taxpayer is a professional sportsperson who was involved in an on-field breach of the sport's code of conduct. As a result, a fine was imposed by the disciplinary body on the employer, and the employer passed the fine onto the taxpayer. The taxpayer's employment contract requires them to obey all instructions of their employer. The breach was committed at the instructions of the employer.

The type of breach committed by the taxpayer can be distinguished from other on field incidents on the basis that:

•

the breach was of a professional sports code of conduct, not an Australian or foreign law

•

the breach occurred as a result of complying with an employment contract term under staff instruction and

•

the offence was not of a type that required adjudication by a sports tribunal.

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 where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

However, under section 26-5 of the ITAA 1997, a deduction will not be allowed for an amount payable by way of penalty under an Australian or foreign law. In this case, the fine was not payable under an Australian or foreign law and therefore section 26-5 of the ITAA 1997 has no application.

Therefore, fines and penalties imposed by professional and sporting bodies may be deductible (depending on the facts) under section 8-1 of the ITAA 1997, if the requisite connection with income exists.

Whether an expense has the requisite connection with gaining or producing assessable income has been well established through case law. Some of these principles are discussed below.

Characterisation

The question to be asked is whether the occasion of the outgoing operates to give it the essential character of a working expense, ie whether the occasion of the outgoing is to be found in the income earning activity itself (Fletcher v. Federal Commissioner of Taxation (1991) 173 CLR 1; [1991] HCA 42; 91 ATC 4950; (1991) 22 ATR 613).

Requisite connection

The taxpayer must show a real connection between the expenditure and their activities as an employee in order for the expenditure to be deductible (Federal Commissioner of Taxation v. Smith (1981) 147 CLR 578; [1981] HCA 10; 81 ATC 4114; (1981) 11 ATR 538).

Incidental and relevant

For an outgoing to be deductible from a taxpayer's assessable income, the expenditure must have been incidental and relevant to the gaining or producing of the taxpayer's assessable income (Ronpibon Tin NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; [1949] HCA 15; (1949) 8 ATD 431; (1949) 4 AITR 326).

In Commissioner of Taxation v. Cooper (1991) 29 FCR 177; [1991] FCA 164; 91 ATC 4396; (1991) 21 ATR 1616, Hill J said at FCR 198:

It will often, therefore, be necessary to analyse with some care what the operations or activities are that are regularly carried on by the taxpayer for the production of income, and to determine whether the outgoings (or where relevant the losses ) are incidental and relevant to those operations or activities. [Emphasis added]

Hill J further considered whether the requirement by the employer to incur certain expenditure, would make the expenditure 'incidental and relevant' at FCR 200:

Assuming that that letter was a direction lawfully given under Mr Cooper's contract, it does not follow that the expenditure must be deductible. An employer may require an employee to travel to and from work by a particular mode of transport, but the fact that the employee is required, as a term of his employment, to incur a particular expenditure does not convert expenditure that is not incurred in the course of the income producing operations into a deductible outgoing. If it did, then, no doubt, employers would be besieged by employees with requests that the employer should require the particular expenditure to be incurred.

Whilst in this case, the penalty has arisen as a result of action in the course of on-field activity, the expenditure is not made for the purpose of earning assessable income. The fine arose as a result of something that the taxpayer did, but the expense was not a normal part of the taxpayer's earning activity. Nor was it designed to earn the taxpayer assessable income. There was merely a temporal coincidence between the outgoing and the income earning activity.

Accordingly, the expense does not have the requisite connection with gaining or producing assessable income and is not deductible under section 8-1 of the ITAA 1997.

Amendment History

Year of income:  Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   section 8-1
   section 26-5

Case References:
Federal Commissioner of Taxation v. Cooper
   (1991) 29 FCR 177
   [1991] FCA 164
   91 ATC 4396
   (1991) 21 ATR 1616

ATO Interpretative Decisions overturned by this decision
ATO ID 2003/321

Business Line:  Individuals

Date of publication:  5 December 2003

ISSN: 1445-2782