Edited version of private advice

Authorisation Number: 1052144202344

Date of advice: 19 July 2023

Ruling

Subject: Deduction for settlement payment

Question

Is the settlement amount deductible to you under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period(s)

Year ended 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

Background

You operated a primary production business (farming business).

You entered into a written Lease Agreement to conduct your farming business.

You agreed to conditions of the Lease Agreement to maintain the farm, pastures and shedding to the condition it was leased in.

Deed of settlement

A Deed of settlement was created regarding breaches of terms of the Lease Agreement.

In order to avoid the cost, expense and inconvenience of further litigation, you incurred an outgoing by paying an amount pursuant to the terms in the Deed.

You agreed to settle your respective claims to avoid the cost, expense, and inconvenience of further litigation by agreeing to the terms set out in the Deed, without the admission of liability.

The amount to be paid under the Deed was paid in two instalments.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 subsection 8-1(1)

Income Tax Assessment Act 1997 subsection 8-1(2)

Reasons for decision

Summary

The settlement amount paid to finalise a lease dispute is deductible to you under section 8-1 of the ITAA 1997.

Detailed reasoning

Under subsection 8-1(1) of the ITAA 1997:

You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a • business for the purpose of gaining or producing your assessable income.

(Collectively referred to as "the positive limbs")

However, under subsection 8-1(2) of the ITAA 1997, you cannot deduct a loss or outgoing under this section to the extent that:

(a)  it is a loss or outgoing of capital, or of a capital nature; or

(b)  it is a loss or outgoing of a private or domestic nature; or

(c)   it is incurred in relation to gaining or producing your * exempt income or your * non-assessable non-exempt income; or

(d)  a provision of this act prevents you from deducting it.

(Collectively referred to as "the negative limbs")

The Positive limbs

To be deductible under section 8-1 of the ITAA 1997, the positive limbs in subsection 8-1(1) of the ITAA 1997 require there to be a nexus between the loss or outgoing paid by you and the gaining or production of its assessable income, or the carrying on of its business for that purpose.

In determining whether a loss or outgoing is characterised as having been incurred in gaining or producing assessable income, the courts have considered whether the loss or outgoing is incidental and relevant to the operations or activities regularly carried on by the taxpayer for the production of income.

Section 8-1 positive limbs - Conclusion

As the outgoing was necessarily incurred in carrying on your business for the purpose of gaining or producing your assessable income, the payment satisfies the positive limbs of subsection 8-1(1) of the ITAA 1997.

To determine whether the payment is deductible under section 8-1 of the ITAA 1997, it must also be determined whether any of the exclusions under the negative limbs of subsection 8-1(2) of the ITAA 1997 apply.

Section 8-1 negative limbs

The payments were not of a capital nature.

The payments occurred as a result of the lack of repairs needed to maintain the land that was used in the day-to-day operations of your primary production business and is a release from any liability regarding the former leased land.

Considering the remaining criteria in subsection 8-1(2) of the ITAA 1997, the payment is also not:

•         of a private or domestic nature, or

•         incurred in relation to producing exempt or non-assessable non-exempt income, or

•         subject to another provision in ITAA the 1997 that would prevent the deduction.

Conclusion

The payment of the settlement amount meets the requirements to be an allowable deduction under section 8-1 of the ITAA 1997.