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Edited version of private advice
Authorisation Number: 1012649110870
Ruling
Subject: Capital gains tax
Question
Will a capital loss arise in respect of the payments you make to the Department of Defence (DOD) including the interest charges and your legal fees?
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 employed by a government department.
As part of the conditions of your employment you undertook a course of study and in return you were required to work for a stipulated period of time.
You left the departments employ prior to the agreed period.
The department lodged a legal claim against you to recover the full cost of your training including the cost of your salary, superannuation, allowances, academic fees and overheads involved with your employment.
You have incurred legal expenses in relation to the legal proceedings.
The department agreed to release you and under a deed of agreement you are required to pay back a specified amount.
The amount is due in instalments with charging interest on the outstanding balance.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-25
Income Tax Assessment Act 1997 Section 104-35
Income Tax Assessment Act 1997 Section 108-5
Reasons for decision
A capital gain or a capital loss is made when a CGT event happens. The range of CGT events is broad, however most CGT events will only be relevant to you where they relate to the disposal of a CGT asset that you own: Guide to capital gains tax 2013-14 (NAT 4151).
While a right to enforce a contractual obligation can be a CGT asset, it is not relevant to you because the right to enforce the contractual obligation is owned by the DOD.
In this instance no CGT event has happened to a CGT asset of yours. Indeed it is arguable you have actually acquired something when making the payments to the DOD, that is the right to be employed elsewhere.
Therefore, as a CGT event does not happen to a CGT asset you own, the making of the payments to the DOD including interest charges and your legal fees do not give rise to a capital loss.