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Edited version of your written advice
Authorisation Number: 1051274788643
Date of advice: 29 August 2017
Ruling
Subject: Repayment of workers compensation
Question 1
Can you claim a deduction at D15 for repaying the amount received in the 2015 and 2016 years?
Answer
No.
Question 2
Can you reduce your assessable income for the 2015 and 2016 years by the amounts repaid?
Answer
Yes.
This ruling applies for the following periods
Year ended 30 June 2015
Year ended 30 June 2016
Year ended 30 June 2017
The scheme commenced on
1 July 2014
Relevant facts
You sustained serious injuries in an accident involving your own vehicle.
You were paid compensation while convalescing in the 2015 and 2016 years.
The payments were declared on your taxable income for those years, and tax was withheld from those payments.
You have been awarded damages and have repaid the compensation in full from the money received from the damages payment, in the 2017 tax year.
The damages that you were awarded were non-taxable.
You repaid the gross amounts of compensation you received in the 2015 and 2016 years, in the 2017 year, when you received a lump sum compensation payment.
The lump sum compensation payment you received in 2017 was paid by your car insurance.
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 59-30
Income Tax Assessment Act 1997 subsection 59-30(3)
Reasons for decision
Deduction
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which 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 except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income, or a provision of the ITAA 1997 prevents it.
A number of significant court decisions have determined that for an expense to be an allowable deduction:
● it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. FC of T; (1958) 100 CLR 478),
● there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. FC of T, (1949) 78 CLR 47), and
● it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore Co (WA) Pty Ltd v. FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).
The essential character of the expense is a question of fact to be determined by reference to all the circumstances.
In your situation, you were required to repay in full the gross amount received in 2015 and 2016. This amount is not considered to be an expense incurred in the course of earning your assessable income.
Your expenditure for repaying the amount is not deductible. 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.
Assessable income
You have now repaid your compensation benefits following your motor vehicle accident settlement.
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.
However, subsection 59-30(3) of the ITAA 1997 states this section does not apply to an amount you must repay because you received a lump sum as compensation or damages for a wrong or injury suffered in your occupation.
In your case, the motor vehicle accident settlement was not received for a wrong or injury you suffered in your occupation. Therefore subsection 59-30(3) of the ITAA 1997 is not relevant in your circumstances.
The repaid amount is not assessable and not exempt income under section 59-30 of the ITAA 1997.
You have repaid the amounts in the 2014-15 and 2015-16 income years. Therefore the relevant amounts should be removed from your assessable income in the 2014-15 and 2015-16 income years.
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