Edited version of private advice

Authorisation Number: 1051801543081

Date of advice: 2 February 2021

Ruling

Subject: Self education expense (fees repaid to employer on separation)

Question

Can you claim a deduction for damages paid for a breach of employment contract under section8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period

Year ended 30 June 20XX.

The scheme commences on

1 July 20XX.

Relevant facts and circumstances

You were employed by ABC company (your employer).

You commenced studying a master's degree at University.

Your employer agreed to pay 50% of the course fees on your behalf.

The employers offer was made with the following conditions:

•         That you remain employed with your employer for the duration of the course, and for twelve months on completion of the course;

•         That if you left the employment with your employer before the time stipulated in

-        That the monies paid by your employer in the previous twelve months be repaid to the employer; and

•         That if you left the employment of your employer before the time stipulated in

-        That you authorised your employer to deduct any monies owed from your severance payment.

You terminated your employment with your employee before the conditions were met.

You were required to repay $XXXX of University Fees paid by your employer on your behalf.

You received your final severance payment of which $XXXX had been deducted in full.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Section 8-1 of the ITAA 1997 allows a deduction for all losses or outgoings to the extent to which they are incurred in gaining or producing assessable income, except to the extent that they are outgoings 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 & Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; [1949] HCA 15; (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.

The payment for damages (being repayment of self-education expenses) to your employer by you is not related to the earning of assessable income. The payment represents expenditure incurred by you for breaching the terms of the employment contract. Therefore, the expenditure for damages cannot be said to have been incurred as a self-education expense.

Accordingly, the damages paid for breach of employment contract in relation to the self-education expense claim is not an allowable deduction under section 8-1 of the ITAA 1997 as it was not incurred in gaining or producing assessable income

ATO view documents

ATO Interpretative Decision ATO ID 2002/902 Income Tax - Deductibility of damages paid for breach of employment contract - repayment of self-education expense