Deductibility of Damages Payment

Is the taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for a damages payment, paid by the taxpayer in a discrimination case?

No. The taxpayer is not entitled to claim a deduction for the damages payment under section 8-1 of the ITAA 1997 as these expenses were not incurred in relation to the gaining or producing of assessable income.

The taxpayer was the proprietor of a service business. The taxpayer personally refused service to a group of people. This group then made a claim of discrimination to the Anti-Discrimination Tribunal and sought damages compensation. In its decision, the Tribunal found that the taxpayer had personally discriminated. It ordered that the taxpayer pay the affected individuals of the group an amount for damages compensation.

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 loss or outgoings are of a capital, private or domestic nature or are necessarily incurred in gaining or producing exempt income.

The refusal of service did not arise from the carrying on of the taxpayer's business, which is to provide service to patrons within the constraints of the law. This situation is distinguished from that in the Herald & Weekly Times Ltd v. Federal Commissioner of Taxation (1932-33) 48 CLR 113; (1932) 39 ALR 46; (1932) 6 ALJR 314; [1933] VLR 112; 2 ATD 169 where the need to pay damages arose directly from the taxpayer's income producing activity. The compensation for damages payment will not be deductible as it does not satisfy subsection 8-1 of the ITAA 1997.