Edited version of your written advice

Authorisation Number: 1012777794275

Ruling

Subject: lump sum payments

Question 1

Are you able to spread a lump sum payment of annual leave and long service leave, over the period of employment that it relates to by declaring the income over the 20XX to 20YY income years?

Answer

No.

Question 2

Are you able to claim a deduction for legal, travel, telephone and internet expenses directly connected and incurred in the pursuit of payment of unused annual leave and long service leave from your ex-employer?

Answer

Yes.

Question 3

Are you able to claim a deduction for any travel costs, or phone and internet costs that are not directly connected to the legal action undertaken in the pursuit of the payment of unused annual leave and long service leave from your ex-employer?

Answer

No.

Question 4

Are you able to claim a deduction for any moving house costs, professional psychological counselling costs, or medication costs?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX to year ended 30 June 20ZZ

The scheme commenced on:

1 July 2004

Relevant facts and circumstances

After several years of employment, you ceased work with an employer.

You engaged legal representation to recover unused annual and long service leave entitlements that were not paid to you upon cessation of your employment.

The matter was settled by way of a Deed of Release, with your ex-employer agreeing to pay you an amount for your annual and long service leave entitlements.

In the period since you have ceased employment with them, you have incurred various expenses, such as: legal costs, travel costs, professional psychological counselling costs, moving house costs, medication costs and phone and internet costs.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 83-10

Income Tax Assessment Act 1997 Section 83-15

Income Tax Assessment Act 1997 Section 83-80

Income Tax Assessment Act 1997 Section 83-85

Reasons for decision

Question 1

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

ATO Interpretative Decision ATO ID 2002/391 states that annual and long service leave payments are considered ordinary income as they are paid directly as a result of the personal services an employee renders for their employer.

Section 83-10 of the ITAA 1997 provides that a lump sum payment for unused annual leave is included in a taxpayer's assessable income in the year it is received and taxed at marginal rates. Section 83-80 of the ITAA 1997 provides that a lump sum payment for unused long service leave accrued after 17 August 1993 is included in a taxpayer's assessable income in the year it is received and taxed at marginal rates.

Therefore, under sections 83-10 and 83-80 of the ITAA 1997, you are required to include your lump sum for annual leave and long service leave as assessable income in the year you received it, that is, the 2014-15 financial year.

Sections 83-15 and 83-85 of the ITAA 1997 provide that a tax offset may be available in relation to these lump sums if they were paid in connection with a genuine redundancy payment, an early retirement scheme payment or the invalidity segment of an employment termination payment or superannuation benefit. The information you submitted provides no indication that these sections are applicable in your situation; therefore no further comment is made on these provisions.

Question 2

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, or relate to the earning of assessable income.

In determining whether a deduction for legal expenses is allowed under section 8-1 of the ITAA 1997, the nature of the expenses must be considered (Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 3 AITR 436; (1946) 8 ATD 190). The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses.

If the advantage is of a capital nature, then the expenses incurred in gaining the advantage will also be of a capital nature.

Although unused annual leave and long service leave are assessed under specific tax provisions, this does not alter the character of these payments as ordinary income.

In your case, you incurred legal expenses in order to obtain a payment of unused annual and long service leave from your previous employer. This has resulted in you gaining assessable income. There is a clear connection between the assessable income and the expense. The expenses were not capital, private or domestic in nature.

It follows that you are able to claim those costs directly connected with your pursuit of that income, being the legal fees, as well as relevant associated travel costs, phone and internet costs directly connected to the legal action to gain that income.

Questions 3 and 4

Travel, phone or internet costs that are not directly connected to the legal action involved in the gaining of this income, are not deductible as they do not have a sufficient nexus to the gaining of your assessable income and are also considered to be private or domestic in nature.

Your medication costs, professional psychological counselling expenses and your house moving costs are also not sufficiently related to the gaining of your assessable income and are private or domestic in nature. Therefore, these expenses are also not deductible.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).