ATO Interpretative Decision
ATO ID 2002/63
Income Tax
Deductibility of Damages PaymentFOI status: may be released
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for a damages payment, paid by the taxpayer in a discrimination case?
Decision
No. The taxpayer is not entitled to claim a deduction for the damages payment under section 8-1 of the ITAA 1997 as these expenses were not incurred in relation to the gaining or producing of assessable income.
Facts
The taxpayer was the proprietor of a service business. The taxpayer personally refused service to a group of people. This group then made a claim of discrimination to the Anti-Discrimination Tribunal and sought damages compensation. In its decision, the Tribunal found that the taxpayer had personally discriminated. It ordered that the taxpayer pay the affected individuals of the group an amount for damages compensation.
Reasons for Decision
Section 8-1 of the ITAA 1997 allows a deduction for all losses or outgoings to the extent that they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, no deduction is allowed to the extent that the loss or outgoings are of a capital, private or domestic nature or are necessarily incurred in gaining or producing exempt income.
The refusal of service did not arise from the carrying on of the taxpayer's business, which is to provide service to patrons within the constraints of the law. This situation is distinguished from that in the Herald & Weekly Times Ltd v. Federal Commissioner of Taxation (1932-33) 48 CLR 113; (1932) 39 ALR 46; (1932) 6 ALJR 314; [1933] VLR 112; 2 ATD 169 where the need to pay damages arose directly from the taxpayer's income producing activity. The compensation for damages payment will not be deductible as it does not satisfy subsection 8-1 of the ITAA 1997.
Date of decision: 12 December 2001Year of income: Year ending 30 June 2002
Legislative References:
Income Tax Assessment Act 1997
section 8-1
Case References:
Herald and Weekly Times Ltd v. Federal Commissioner of Taxation
(1932-33) 48 CLR 113
39 ALR 46
6 ALJR 314
[1933] VLR 112
2 ATD 169
Keywords
Deductions & expenses
Compensation expenses
Date reviewed: 12 April 2018
ISSN: 1445-2782