ATO Interpretative Decision

ATO ID 2002/663

Income Tax

Deductions & Expenses: Sum paid in settlement of a harassment and victimisation claim
FOI status: may be released
Status of this decision: Decision Current
CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Is the sum paid by the taxpayer in settlement of a sexual harassment and victimisation claim deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. The sum paid by the taxpayer in settlement of a sexual harassment and victimisation claim is not deductible under section 8-1 of the ITAA 1997.

Facts

The taxpayer is an employee. The duties of the taxpayer did not include advising other employees on their work performance.

Another employee lodged a complaint of sexual harassment and victimisation against the taxpayer with the relevant Government Authority.

The taxpayer denied the allegations made. The matter proceeded to the relevant Government Authority where it was resolved through a conciliation agreement.

The taxpayer agreed to pay a settlement amount for pain, suffering and cost. In exchange all parties agreed to take no further action.

Reasons for Decision

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent that they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

For the settlement sum to constitute an allowable deduction, it must be shown that it was incidental or relevant to the production of the taxpayer's assessable income (Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431).

In determining whether a deduction for the settlement sum is allowable under section 8-1 of the ITAA 1997, the nature of the expenditure must also be considered (Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 3 AITR 436; (1946) 8 ATD 190).

Therefore expenses as a result of legal action are generally deductible if the expenses arise out of the day to day activities of the taxpayer's business (Herald and Weekly Times Ltd v. Federal Commissioner of Taxation (1932) 48 CLR 113; (1932) 39 ALR 46; (1932) 2 ATD 169) and the legal action has more than a peripheral connection to the taxpayer's income producing activities (Magna Alloys and Research Pty Ltd v. FC of T (1980) 49 FLR 183; (1980) 11 ATR 276; 80 ATC 4542).

Similarly, in the FC of T v. Rowe (1995) 60 FCR 99; (1995) 31 ATR 392; 95 ATC 4691, the court accepted that legal expenses incurred in defending the manner in which a taxpayer performed his employment duties were allowable. No significance was placed by the court on the taxpayer's status as an employee.

Generally, the treatment of a settlement sum or damages payment will follow the treatment of the other legal costs incurred in relation to a particular matter. Legal expenses incurred by a taxpayer in defending a sexual harassment and victimisation claim made by another employee do not arise as a consequence of the performance of the taxpayer's duties by which they derive their assessable income.

Accordingly, the settlement sum paid by the taxpayer in relation to the sexual harassment and victimisation 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.

Date of decision:  17 December 2001

Year of income:  Year ending 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   section 8-1

Case References:
Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation
   (1949) 78 CLR 47
   (1949) 4 AITR 236
   (1949) 8 ATD 431

Hallstroms Pty Ltd v. Federal Commissioner of Taxation
   (1946) 72 CLR 634
   (1946) 3 AITR 436
   (1946) 8 ATD 190

Herald and Weekly Times Ltd v. Federal Commissioner of Taxation
   (1932) 48 CLR 113
   (1932) 39 ALR 46
   (1932) 2 ATD 169

Magna Alloys and Research Pty Ltd v. FC of T
   (1980) 49 FLR 183
   (1980) 11 ATR 276
   80 ATC 4542

FC of T v. Rowe
   (1995) 60 FCR 99
   (1995) 31 ATR 392
   95 ATC 4691

Related ATO Interpretative Decisions
ATO ID 2002/66
ATO ID 2002/664

Keywords
Negotiated settlements
Deductions & expenses
Legal expenses

Siebel/TDMS Reference Number:  DW320973; 1-6A55UTO

Business Line:  Small Business/Individual Taxpayers

Date of publication:  26 June 2002
Date reviewed:  4 February 2015

ISSN: 1445-2782