Issue
Whether the repayment of a portion of retention benefit is an allowable deduction under subsection 51(1) of the Income Tax Assessment Act 1936 or section 8-1 of the Income Tax Assessment Act 1997.
Decision
A deduction is not allowable pursuant to subsection 51(1) of the Income Tax Assessment Act 1936 (ITAA 1936) or section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for an amount representing any repayment of the retention benefit.
Facts
The taxpayer has applied for and received a Pilot Retention Bonus payable under Defence Determination 1996/42. This bonus was included in assessable income in the year of receipt. The taxpayer was required to sign a contract securing the taxpayer's services for a period of 5 years. The contract states that if the taxpayer fails to serve the full 5 years, the taxpayer will be required to repay a portion of the retention benefit based on the amount of time not served.
Reasons For Decision
For an outgoing to satisfy the first positive limb of subsection 51(1) of the ITAA 1936 or section 8-1 of the ITAA 1997, the losses or outgoings must be 'incidental and relevant' to the gaining or producing of assessable income: Ronpibon Tin NL v FCT (1949) 78 CLR 47; 4 AITR 236.
Repayments of income by employees resulting from a failure to observe the conditions in the retention agreement are not deductible. The repayment outgoing is not incidental or relevant to the gaining or producing of the assessable income. It is incurred solely as a result of the breach of the agreement ((1958) 7 CTBR (NS) Case 130, 9 TBRD Case J20; (1958) 8 CTBR (NS) Case 50, 9 TBRD Case J60; (1963) 11 CTBR (NS) Case 58, 14 TBRD Case P20; and Case D19 72 ATC 113, (1972) 17 CTBR Case 100 .)