Edited version of private ruling

Authorisation Number: 1011866950913

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Ruling

Subject: Deductibility of payment to employer

Question

Are you entitled to a deduction for the payment made to your employer on termination of your employment?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You commenced a post-graduate course of study at a University in 20XX.

Your employer agreed to pay self-education fees of up to nominated amounts for the financial years ended 30 June 20XX and 20XX.

In 20XX your employer introduced a 'professional development policy', which requires employees to reimburse fees paid by the employer where an employee initiates termination of their employment. The company contribution is recoverable on the following basis:

· within the first 12 months of course commencement: full cost

· within the first five years of course commencement: 2/3 cost

· within the first 10 years of course commencement: 1/3 cost

You terminated your employment in 20XX and will take up a new position with another employer.

Earlier in 20XX you and your employer discussed professional studies reimbursement, and agreed that you would reimburse them for 2/3 of the education costs the company paid, in line with the company's professional development policy.

At the time of you commencing your self-education course there was no requirement, either in writing or implied, for you to reimburse your employer should you leave the company.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasoning

Summary

The payment you made to your employer was incurred due to your termination of employment rather than in the course of earning your employment income. Therefore, you are not entitled to a deduction for this payment.

Detailed reasoning

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 the course of gaining or producing assessable income, but are not allowable to the extent that they are 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 for it to be an allowable deduction.

In cases where money has been repaid by a taxpayer to a former employer for breaching the employment contract, the Board of Review have held that such monies are not allowable deductions: Case J20 (1958) 9 TBRD 109, Case J60 (1958) 9 TBRD 308, Case P20 (1963) 14 TBRD 97 and Case G80 75 ATC 564. It was confirmed 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.

In Board of Review Case P20 (1963) 14 TBRD 97, a surveyor had entered into a bond with his employer prior to receiving his professional qualification. The bond provided that he reimburse his employer the employer's cost of his training should he resign his employment within five years of receiving his qualification. The taxpayer resigned four months after receiving his qualification and was required to repay an amount of $350. The Commissioner disallowed a deduction for this amount and the taxpayer appealed to the Board of Review. In finding for the Commissioner the Board of Review stated:

The expenditure in question flowed directly from the taxpayer's breach of covenant. It was a consequence of the taxpayer's termination of his employment with the department in order to take up duties with a new employer, and even though an increased salary flowed from this move, in no sense can it be said that the outgoing in question was incurred in the course of gaining or producing assessable income from the new source. It was not truly incidental or relevant to the actual derivation of salary income. Likewise, although the expenditure had to be borne for the taxpayer to put himself in the position to earn fees as a private practitioner, it was not necessarily incurred in the course of carrying on a business for the purpose of earning those fees. The liability for the outgoing was independent of any activity of the taxpayer in the gaining of any income by him.

The principles outlined in the above cases may be applied to your particular situation.

In your case, you agreed to reimburse your previous employer as a result of you terminating your employment with the firm. This agreement was in line with the company's professional development policy, even though the policy was introduced after you started your self-education course. The payment would not have been requested had you continued your employment for 10 years after the course commencement. The payment represents an amount incurred as a result of you terminating your employment; therefore it cannot be said to have been incurred as a self-education expense.

As this amount was not incurred in the course of earning your assessable income, you are not entitled to claim a deduction for it.

It's noted that your tax agent argued that ATO ID 2002/902 could be distinguished in your case as they considered there to be no breach of contract. However even if there was no breach, the payment was still incurred due to the termination of your employment, rather than being incurred in the course of earning your assessable income. Therefore, a deduction is not allowable.