Private ruling: WRE - other
Published: August 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to claim a deduction for insurance you paid as a result of an incident that occurred to a third party? | A1: No.

Relevant facts and circumstances: You are an employee. You had an animal which you used in the course of your employment. The animal caused damage to a third party after work hours. The third party claimed the damages through their insurance company. The insurance company found you liable and claimed the amount back from you. You have previously claimed the expenses related to the animal.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which 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. In Ronpibon Tin NL v. Federal Commissioner of Taxation (1949) 78 CLR 47, the Court established that, for a loss or outgoing to be an allowable deduction, there must be a nexus between the outgoing and the assessable income so that the expenditure is incidental and relevant to the taxpayers income-producing or business operations. In Case T22 86 ATC 214, the Board of Review dealt with the issue of whether an insurance excess is deductible. In that case the taxpayer was a self-employed lawn mowing contractor who incurred the expense as a result of an accident that occurred on the way between the premises of his last client for the day and a service station where he frequently fuelled his lawn mowers. In the aforementioned case, the taxpayer was allowed the deduction as the nature of the taxpayer's income earning activity was such that they were itinerant or frequently travelling by motor vehicle between clients and therefore the accident and the consequent expense to the taxpayer was an incident of their income earning activity. In your case, you have been found liable in an insurance claim in relation to the actions of your animal. While we accept that your animal is used in gaining or producing your assessable income, the incident that resulted in the insurance claim was unrelated to your work duties. Therefore, there is no nexus between the outgoing incurred and your assessable income. You are not entitled to a deduction under section 8-1 of the ITAA 1997 for the insurance payment as a result of an incident that occurred to a third party.