Edited version of your written advice

Authorisation Number: 1012688656808

Ruling

Subject: Reimbursement

Question

Is the reimbursement of your legal expenses assessable income?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2015

The scheme commenced on:

1 July 2014

Relevant facts

The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

• the application for private ruling,

• settlement and release agreement and

• copy of receipts for legal fees incurred.

You are an employee.

You incurred legal expenses in relation to a matter in the workplace.

Under a settlement agreement with your employer, your employer was required to pay you an amount to cover your legal costs.

The payment will be made in the 2014-15 financial year.

You did not and cannot claim a deduction for the legal expenses incurred.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 20-20.

Reasons for decision

Ordinary income

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

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that:

• are earned

• are expected

• are relied upon, and

• have an element of periodicity, recurrence or regularity.

In your case, you have not earned the reimbursement of your legal costs as it does not relate to services performed. The payment is a one-off payment and thus does not have an element of periodicity, recurrence or regularity.

The contribution is not considered to be ordinary income and is not assessable under section 6-5(2) of the ITAA 1997.

Assessable recoupment

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income.

Assessable recoupments are a form of statutory income.

Subsection 20-20(2) of the ITAA 1997 provides that an amount you have received as a recoupment of a loss or outgoing is an assessable recoupment if:

• you received the amount by way of insurance or indemnity, and

• you can deduct an amount for the loss or outgoing for the current year, or you have deducted or can deduct an amount for it in an earlier income year, under any provision of this Act.

The reimbursement of your legal expenses is regarded as being received by way of indemnity. You have not claimed a deduction for the legal expenses incurred.

Where the legal expenses incurred relate to a dispute for the receipt of income such as unpaid wages, then the expenses are of a revenue nature and allowable as a deduction. However, if legal expenses incurred relate to an action for damages for wrongful dismissal, or compensation for loss of employment, then the expenses are of a capital nature and not allowable as a deduction.

In your situation, you did not incur the expenses in trying to obtain unpaid wages or other revenue. As you are not entitled to deduct legal expenses incurred, the reimbursement of your legal expenses does not meet the requirements of section 20-20 of the ITAA 1997.

Therefore, the contribution is not considered to be an assessable recoupment and is not assessable under section 20-20 of the ITAA 1997.

The reimbursement of your legal expenses, paid in accordance with the settlement agreement, does not form part of your assessable income.