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Ruling

Subject: Relocation cost repayment

Question 1

Are you entitled to reduce your assessable income by the amount you were required to pay your employer when you resigned from their employment?

Answer

No.

Question 2

Are you entitled to a deduction for the amount you were required to pay your employer when you resigned from their employment?

Answer

No.

This ruling applies for the following periods

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on

1 July 2011

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Under your employment contract with your former employer, you received a payment for your relocation package.

The payment was part of your income and tax was withheld.

You declared this payment in the relevant tax return.

Under the employment contract, you had to pay back the relocation amount if you leave the company within three years. The payback amount is in accordance with the number of service months completed.

The relocation benefits reimbursement agreement form states that the benefits include all expenses incurred by the company, paid as direct reimbursement or to a third party company on your behalf.

You resigned from your employment before the three year period.

You had to pay back an amount which was equivalent to a percentage of the relocation costs that you had received.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 8-1.

Income Tax Assessment Act 1997 - Section 6-5.

Income Tax Assessment Act 1997 - Section 59-30

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Salary and wages and allowances are regarded as ordinary income and therefore assessable under subsection 6-5(2) of the ITAA 1997.

In the relevant income year, you received income from your employer. This income was assessed as ordinary income. The payment was made subject to certain conditions one of which included the recipient to repay some or all of the payment if they fail to serve the required time. Any repayment made is therefore considered an amount paid for breach of contract.

Section 59-30 of the ITAA 1997 states that an amount you receive is not assessable and is not exempt income for an income year if:

(a)   you must repay it; and

(b)   you repay it in a later income year; and

(c)   you cannot deduct the repayment for any income year.

Where an amount of income has been repaid, you may be able to request an amended assessment be issued for the year in which that income was originally returned.

In your case, your contract required an amount to be repaid if you left within three years. The amount you were required to pay was designed to reimburse your employer for some of the relocation costs incurred. It does not represent a repayment of your assessable income. Therefore, you are not entitled to amend your assessment for the relevant income year to reduce your assessable income by this amount.

Allowable deductions

According to section 8-1 of the ITAA 1997, you can deduct a loss or outgoing if it is incurred in producing your assessable income except where the outgoing is of a capital, private or domestic nature.

Taxation Ruling IT 2614 states that removal and relocation expenses to take up an appointment with a new or existing employer are not allowable deductions, even if an allowance or reimbursement is received. This is so whether the transfer is voluntary or at the employer's request. Relocation expenses are not deductible because the expenses come at a point in time too soon to be regarded as being incurred in gaining or producing assessable income. These expenses are a prerequisite to the earning of income. They are incurred in getting, not in doing, work.

In Case D19 72 ATC 113 having been awarded a teacher training studentship, the taxpayer entered into an agreement with the Education Minister. One condition of the agreement was that upon the completion of the course, he was to perform teaching services in any school/s to which he might be appointed, for a certain number of days. In the event of breach or non-observance of the conditions, the taxpayer would become liable to pay to the Minister a sum equal to the total of all the allowances paid to him. The taxpayer failed to observe the agreement and was liable to repay the total amount of the allowances he had been paid. His claim for a deduction for the amount so repaid was disallowed. It was held that the liability to make the payment arose from the breach of the agreement, and was not incidental to the gaining or producing of assessable income. The most that could be said for the payment was that it was expenditure incurred by the taxpayer in choosing between two possible avenues of employment (as a teacher or otherwise).

As discussed above, the money you were required to pay related to your relocation reimbursement to your previous employer. It is not considered to be an expense incurred in the course of earning your assessable income as an employee. It is a payment required to be made under the contract agreement you had with your employer. Your expenses were not incurred to produce income, but to repay a debt under the contract. The liability to repay would not have arisen had you continued to work for the three years.

Although the payment when received was assessable income, this does not automatically entitle you to a deduction for expenses incurred in relation to the payment. The expenses must meet the criteria for deductibility under section 8-1 of the ITAA 1997.

Your expenditure for repaying the relocation benefit is not deductible, even though the expenditure had a causal connection with the earning of income. The expenditure is not incurred in the actual performance of your work. Therefore, the associated expenses are not an allowable deduction under section 8-1 of the ITAA 1997.

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