Private ruling: Deductions - settlement sum
Date of advice: 31 May 2023
Published: 17 July 2023
Ruling period: Year Ending 30 June 2023
Date scheme commenced: 1 July 2022

Ruling: Q1: Are you entitled to a deduction for the Settlement Sum paid under the terms of the Deed of Settlement and Release (Deed) under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. Relevantly, section 8-1 of the ITAA 1997 provides that you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income, or it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, you cannot deduct a loss or outgoing under this section if a provision of this Act prevents you from deducting it. Compensation amounts generally bear the character of that which they are paid to replace. The terms of the Deed provide that one of your partners was required to pay the Settlement Sum in compensation for not having a relevant agreement in place. If you had paid for the relevant agreement the amount paid would have been deductible under section 8-1 of the ITAA 1997. As the partner was not convicted of any offence against an Australian law section 26-54 of the ITAA 1997 has no application and will not prevent you from claiming a deduction for the Settlement Sum.

Relevant facts and circumstances: You carry on a business in partnership. One of your partners entered into a Deed to settle a matter where the partner had undertaken an activity without a relevant agreement in place. You paid the Settlement Sum in accordance with the Deed. The partner was not convicted of any offence against an Australian Law in relation to the matter.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 26-54