Bank Fee Legal Action - Would Any Recoupment be Taxable?

It has been reported that up to 22000  people have signed up for the class action against Australia's banks over $5 billion of penalty fees charged during the last six years.

With the bank fee legal action gathering steam, it is estimated businesses will have claims of up to $5000. But where do these businesses stand with the tax office if the legal action is successful? Will the tax office be lining up for its share of the money?

Income:

The Income Tax Assessment Act (ITAA) 1997 specifically makes assessable any "recoupment" of a loss or outgoing - ie. recoupment of an expenses previously claimed as an allowable deduction (Subdiv 20-A).

For Subdiv 20-A to operate, there must be an “assessable recoupment” (s 20-20). “Recoupment” of a loss or outgoing is broadly defined to include any kind of reimbursement, refund, insurance, indemnity or recovery, or a grant in respect of the loss or outgoing (s 20-25(1)). The concept of “indemnity” covers an adjustment in the vendor’s favour for council and water rates and land taxes in a contract for the sale of a business or of real property (Goldsbrough Mort & Co 76 ATC 4343). A taxpayer is also taken to receive a recoupment if another entity pays an amount on the taxpayer’s behalf, or if the taxpayer receives an amount for disposing of the right to receive a recoupment (s 20-25(2), (3)).

Accordingly, a recoupment of bank fees received by way of the intended legal action against the banks will be an “assessable recoupment” and taxed at marginal rates of tax in the income year it is received.

Expenses incurred in recovering such expenses would be an allowable deduction against the recoupment of bank fees. An invoice or summay from any legal firm acting on behalf of a business relating to such expense would need to be obtained to support the claim and or detail the amount received and the bases of it's calculation.

Private:

Of course, if the bank fees related to recoupment of an expenses on "private" account - ie, not related to an income earning/business activity and not previously deducted as an expenses in relation to an income earning activity, then the recoupment provisions under Subdiv 20-A will not apply and such monies would be non-assessable - ie. tax free.

By David Maynard

Copyright 2014. My Tax Zone.