Private ruling: Business employee expenses
Published: June 2014
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is an amount paid for expenses of one of your injured workers, a tax deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in the 2012-13 financial year? | A1: Yes | Q2: Is the settlement lump sum settlement payment for damages under a common law claim by a former injured worker, a tax deduction under section 8-1 of the ITAA 1997 in the 2012-13 financial year? | A2: Yes


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

Reasons for decision: Summary: Section 8-1 of the ITAA 1997 allows a deduction for all losses or outgoings to the extent that they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, no deduction is allowed to the extent that the losses or outgoings are of a capital, private or domestic nature or are incurred in gaining or producing exempt income. For a settlement sum (or part of it, where specified) to constitute an allowable deduction, it must be shown that it was incidental or relevant to the production of your assessable income. In your case you incurred the expenses to cover various amounts as a result of a worker employed by you to earn your assessable income. The amounts paid were necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. The individual amounts are all of a revenue nature and therefore the full amount is deductible under section 8-1 of the ITAA 1997. Section 8-1 of the ITAA 1997 allows a deduction for all losses or outgoings to the extent that they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, no deduction is allowed to the extent that the losses or outgoings are of a capital, private or domestic nature or are incurred in gaining or producing exempt income. Sums paid in defending or settling tortious actions are generally deductible if liability for the alleged tort or other wrongful action arose out of, or in connection with, the carrying on of the income-earning activities, and the particular tort, etc., alleged represents that kind of casualty, mischance or misfortune which is a natural or recognised incident of the income-earning activities ( C of T (NSW) v Ash (1938) 61 CLR 263 per Rich J at p 277). In other words, legal expenses are generally deductible if they arise out of the day-to-day activities of the taxpayer's business ( Herald and Weekly Times Ltd v FC of T (1932) 48 CLR 113; (1932) 39 ALR 46) and the legal action has more than a peripheral connection to the taxpayer's income-earning activities ( Magna Alloys and Research Pty Ltd v FC of T 80 ATC 4542). Each case must, however, be examined separately and the decided cases must be confined to their own particular facts. In your case you settled a common law claim with Workcover who settled for a once-and-for-all amount with the injured former worker. The claim arose out of an incident which occurred while the worker was working for you in order for you to derive assessable income. The amount was clearly paid as a consequence of day to day activities being carried out by your business. You are therefore entitled to claim a deduction for the full amount of once-and-for-all amount under section 8-1 of the ITAA 1997.

Relevant facts: You operated a business as a sole trader. | You paid your workers on an hourly basis. | You did not have a workcover policy for your workers as you believed they were sub-contractors. | A worker was injured while working for you and made a claim with Workcover. | Workcover advised you that the worker had made a claim. | Your insurance company declined your claim. | You were advised by Workcover that they would handle the claim and advise you of your liability. | Workcover subsequently advised you that you owed them an amount for statutory benefits which you paid to them. | Following the finalisation of the worker's statutory claim and the subsequent denial of acceptance of your claim on your insurance policy, the worker commenced a common law claim. | The amount of the original common law claim, prior to settlement, was a large amount. | Workcover resolved the claim and agreed to pay a smaller amount as a once-and-for-all payment. | Workcover advised you that you owed them the amount of the once-and-for-all amount which was a lump sum payment for damages under a common law claim. You paid this amount to Workcover. | You paid the once-and-for-all amount by obtaining a loan from the bank.