ATO Interpretative Decision
ATO ID 2002/902
Income TaxDeductibility of damages paid for breach of employment contract - repayment of self education expense
FOI status: may be released
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Status of this decision: Decision Current
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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.
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)?
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.
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 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 & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (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.Date of decision: 12 November 1998
Year of income: Year ended 30 June 1998 Year ended 30 June 1999
Income Tax Assessment Act 1997
Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation
(1949) 78 CLR 47
(1949) 4 AITR 236
(1949) 8 ATD 431
Self Education expenses
Deduction and expenses
Breach of contract