Edited version of private advice

Authorisation Number: 1052272820145

Date of advice: 2 September 2024

Ruling

Subject: Deductions - settlement amount

Question 1

Is the $X alleged misappropriations amount described in the Deed (Amount 1) paid by you, deductible under 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in the income year ended 30 June 20XX?

Answer

Yes.

The settlement amount is deductible under section 8-1 of the ITAA 1997 as it is an expense incurred in gaining or producing assessable income.

The nature of the expenditure arose as a result of your day-to-day income producing activities as an employee. The outgoing was calculated to bring to an end a litigation risk which had as its source your employment. The activities that produced your assessable income were what exposed you to the liability against which you were defending yourself and ultimately led to the settlement payment.

Question 2

Is the $X alleged misappropriations amount described in the Deed (Amount 2) paid by you, deductible under 8-1 of the ITAA 1997 in the income year ended 30 June 20XX?

Answer

Yes.

The settlement amount is deductible under section 8-1 of the ITAA 1997 as it is an expense incurred in gaining or producing assessable income for the reasons outlined above.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 June 20XX

Relevant facts and circumstances

You had an employment agreement with your Employer as Chief Executive Officer (CEO).

You were one of two executive directors of your Employer.

You were the only executive director with an accountancy qualification.

You were responsible for managing the Employer's business.

As an employee you were responsible for the planning and implementation of the capital works program for your Employer's business, including the engagement and payment of suppliers undertaking capital works.

Your day-to-day work activities included the following:

•         oversight of the Employer's business operations

•         development and implementation of the Employer's strategic business plan

•         engagement and communication with government, industry and investor groups

•         management of the Employer's central financial and operational performance, compliance and marketing.

You retired in MMYYYY and received an employment termination payment of $X.

Allegations against you arose following an investigation by your Employer into the incorrect accounting treatments and apparent misappropriations of their funds during your time as CEO.

A legal letter of demand dated DDMMYYYY outlined the allegations.

No court proceedings were initiated.

On DDMMYYYY, you and your former Employer entered into a Deed of Settlement and Release (Deed). You agreed to pay a settlement sum of $X (Settlement Sum) to your Employer to settle a claim made by your Employer. A copy of the Deed was provided.

The Deed breaks the Settlement Sum down as follows:

a)            Amount 1 (X in respect of the alleged misappropriations in the period between DDMMYYYY and DDMMYYYY);

b)            Amount 2 ($X in respect of an invoice issued by Contractor to Employer);

The Deed provides that the settlement is made without admission of liability.

The Deed provides that the settlement is made to avoid the costs and inconvenience associated with litigation.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1.