Deductibility of Fines and Penalties

Is a taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for a fine imposed by their employer?

No. A taxpayer is not entitled to a deduction under section 8-1 of the ITAA 1997 for a fine imposed by their employer?

The taxpayer is a professional sportsperson.

They were involved in an on-field indiscretion.

As a result they were fined by their employer.

Section 8-1 of the ITAA 1997 allows a deduction for all losses or 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.

Under section 26-5 of the ITAA 1997 a deduction will not be allowed for an amount payable by way of penalty under an Australian or foreign law. However this fine was not payable under an Australian or foreign law and therefore section 26-5 of the ITAA 1997 has no application.

There have been a number of cases which have considered the deductibility of fines and penalties under section 8-1 of the ITAA 1997 or previously under subsection 51(1) of the Income Tax Assessment Act 1936 .

The case of Madad Pty Ltd v. Federal Commissioner of Taxation (1984) 4 FCR 420; (1984) 15 ATR 1118; 84 ATC 4739 involved the deductibility of fines and penalties imposed on a taxpayer as a result of breaches of the Trade Practices Act 1974 .

The Federal Court in that case held that the deduction was not allowable and in doing so cited with approval dicta in Federal Commissioner of Taxation v . Snowden & Willson (1958) 99 CLR 431; (1958) 7 AITR 308; 11 ATD 463 ( Snowden & Willson ) and Herald and Weekly Times v. Federal Commissioner of Taxation (1932) 48 CLR 113; 2 ATD 169 ( Herald and Weekly Times ).

In Snowden & Willson Dixon CJ at AITR 312; CLR 437, in relation to cases in which fines and penalties are incurred, said:

There the character of the expenditure and the reasons why the law imposes a fine or penalty separate the expenditure from the conduct of the business. It is not to the point that the conduct penalised found its motive in business considerations.

In Herald and Weekly Times Gavan Duffy CJ and Dixon J at CLR 120, in discussing cases disallowing a deduction for penalties, stated:

The penalty is imposed as a punishment of the offender considered as a responsible person owing obedience to the law. Its nature severs it from the expenses of trading. It is inflicted on the offender as a personal deterrent, and it is not incurred by him in his character of trader.

Even though these cases dealt with breaches of the law rather than a breach of an employer's rules the principles established are equally applicable. The penalty levied by the taxpayer's employer was imposed as a punishment intended as a personal deterrent. The nature of the expenditure severs any connection with the earning of the taxpayer's assessable income. The expenditure was not therefore incurred in earning that income.

Accordingly, the taxpayer is not entitled to a deduction under section 8-1 of the ITAA 1997 for a fine imposed by their employer.