Deductions & expenses: Sum paid in settlement of a harassment and victimisation claim

Is the sum paid in settlement of a harassment and victimisation claim deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No, the sum paid in settlement of a harassment and victimisation claim is not deductible under section 8-1 of the ITAA 1997 as the expense is of a capital or private nature.

The taxpayer is an employee. The duties of the taxpayer did not include advising other employees on the performance of their work.

Another employee lodged a complaint of sexual harassment and victimisation against the taxpayer with the relevant Government Authority.

The taxpayer denied the allegations made. The matter proceeded to the relevant Government Authority where it was resolved through a conciliation agreement.

The taxpayer agreed to pay a settlement amount for pain, suffering and cost. In exchange all parties agreed to take no further action.

Section 8-1 of the ITAA 1997 states 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 and excludes losses or outgoings of a capital, private or domestic nature.

For the settlement sum to constitute an allowable deduction, it must be shown that it was incidental or relevant to the production of the taxpayer's assessable income, Ronpibon Tin NL v. FC of T (1949) 78 CLR 47; 8 ATD 431; 4 AITR 236.

The main reason for the payment of the settlement amount was to ensure that no further action was taken. It was a single payment to obtain an enduring benefit ( Sun Newspapers Ltd v. FC of T (1938) 61 CLR 337; (1938) 45 ALR 10; (1938) 1 AITR 403; 5 ATD 87). The payment was not incurred in the performance of the taxpayer's day to day activity by which the taxpayer derives assessable income ( The Herald and Weekly Times Ltd v. FC of T (1932) 48 CLR 113; Inglis v. FCT 87 ATC 2037).

Therefore, as the payment was not incidental and relevant to the work which produced the taxpayer's assessable income, the expense is capital or private in nature and is not allowable as a deduction.