ATO Interpretative Decision
ATO ID 2002/918 (Withdrawn)
Income TaxStockbroker - Deductibility of amount incurred due to client bad debts
FOI status: may be released
This ATO ID is withdrawn. The ATO view expressed in the ATO ID is current and represents a straight application of the law. Guidance on the view contained in the ATO ID is available at Cash shortages or client bad debts (QC 53953).This document has changed over time. View its history.
Status of this decision: Decision withdrawn 4 October 2018.
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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.
Is the taxpayer, a stockbroker, entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 ('ITAA 1997') for an amount paid to their employer in order to cover outstanding client bad debts?
Yes. The taxpayer, a stockbroker, is entitled to a deduction under section 8-1 of the ITAA 1997 for an amount paid to their employer in order to cover outstanding client bad debts.
The taxpayer is employed as a stockbroker.
As a condition of the taxpayer's employment, the taxpayer is held personally and directly liable for any bad debts for any client they are responsible for or have introduced to the firm.
The taxpayer was required to pay an amount to their employer in order to cover an outstanding client bad debt.
Reasons for Decision
Section 8-1 of the ITAA 1997 allows a deduction for all losses and 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.
Expenses that are 'incidental and relevant' to the taxpayer's income earning activities are considered to be sufficiently connected with the derivation of assessable income and therefore will be an allowable deduction under section 8-1 of the ITAA 1997 (Ronpibon Tin NL & Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47;  HCA 15; (1949) 4 AITR 236; (1949) 8 ATD 431).
Where an employee is required to make up a cash shortfall which has resulted from their employment duties, the amount of the shortfall is considered to be 'incidental and relevant' to the gaining or producing of their assessable income and will be deductible under section 8-1 of the ITAA 1997 (Taxation Ruling TR 95/19 Income tax: airline industry employees - allowances, reimbursements and work-related deductions and ATO Interpretative Decision ATO ID 2002/397 Income tax: deductions - cash shortages paid by an employee).
Similarly, the amount that the taxpayer paid to their employer as a result of a client bad debt, was a necessary or natural consequence of their employment as a stockbroker and therefore is 'incidental and relevant' to their income earning activities.
Therefore, the taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997 for an amount paid to their employer in order to cover outstanding client bad debts.
|Date of Amendment||Part||Comment|
|30 October 2015||Reasons for Decision||Updated citations.|
|Case references||Updated citations.|
Year of income: Year ended 30 June 2002
Income Tax Assessment Act 1997
Ronpibon Tin NL & Tongkah Compound NL v. Federal Commissioner of Taxation
(1949) 78 CLR 47
 HCA 15
(1949) 4 AITR 236
(1949) 8 ATD 431
Related Public Rulings (including Determinations)
Taxation Ruling TR 95/19
ATO ID 2002/397
Deductions & expenses
Work related expenses