Edited version of your private ruling

Authorisation Number: 1012510765032

Ruling

Subject: Income - assessable

Question 1

Is the payment received for damages for unfair dismissal assessable income?

Answer

Yes

Question 2

Are the legal expenses relating to your unfair dismissal application an allowable deduction?

Answer

No

This ruling applies for the following period

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You were dismissed from your employment and within 12 months lodged a claim for unfair dismissal.

You were awarded damages for unfair dismissal.

You incurred legal expenses pursuing the unfair dismissal claim.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 6-5(1)

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 subsection 82-130(1)

Income Tax Assessment Act 1997 section 82-135

Reasons for decision

Assessability of payment

Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that assessable income includes income according to ordinary concepts, called ordinary income. Section 6-10 of the ITAA 1997 allows for income that is not ordinary income to be included in your assessable income, these amounts are called statutory income.

Employment termination payments (ETP) are capital payments which are considered to be statutory income and are therefore assessable income.

To qualify as an ETP under subsection 82-130(1) of the ITAA 1997 the payment must be:

· received by you

· in consequence of the termination of your employment

· no later than 12 months after your termination, and

· not excluded as an ETP by section 82-135 of the ITAA 1997

Taxation Ruling TR 2003/13 provides an example to explain the 'in consequence of the termination of employment' condition to qualify as an ETP. In the example, Fred Brown was terminated from his employment. He took legal action against his former employer for unfair dismissal. He and his former employer agreed to an out of court settlement and a lump sum was paid to Fred Brown.

The payment was made in consequence of the termination of employment. Although the dominant cause of the payment was the action Fred brought against his former employer, there was a causal connection between the termination and the payment.

In your case, you received a payment for damages for unfair dismissal from your former employer. The payment received qualifies as an ETP and is considered statutory income, therefore it is assessable income.

Legal expenses

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.

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

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

The fact that a capital payment is specifically brought to account as assessable income will not change the nature of the payment. An amount that is capital in nature will remain capital in nature notwithstanding that it is specifically included in the assessable income of the taxpayer.

In your case, the ETP payment received, being damages for unfair dismissal is a capital receipt.

You incurred legal expenses in order to obtain the ETP. Although the ETP will be included as assessable income, the ETP retains its character as a capital receipt.

As the legal expenses were incurred in gaining a capital sum they will also be of a capital nature and are therefore not deductible under section 8-1 of the ITAA 1997.