Edited version of private ruling

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Ruling

Subject: act of grace payment

Will a payment made under section 73 of the Public Service Act 1999 (PSA 1999) be classed as assessable income?

No.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You received two payments relating to an incapacity. The second payment was made in the same financial year but no tax was deducted from this amount due to an apparent mistake by the payer.

Correspondence provided indicates that the payer has accepted that the amount of tax deducted by them in respect of this pay period was understated due to an error on their part. Accordingly, a compensatory payment is expected to be made to you during the year ended 30 June 2011. The payment will be made to you under section 73 of the PSA 1999 which deals with payments in special circumstances.

Paragraphs 6 to 8 of the PSA 1999 Advice Number 30 state that:

Section 73 of PSA 1999 enables the Public Service Minister to authorise payments in special circumstances that arise out of, or relate to, APS employment. Payments made under section 73 may..........be authorised even though the payments would not otherwise be authorised by law or required to meet a legal liability.

It is expected that the Public Service Minister will delegate the power under section 73 of the new PS Act to agency heads.

These arrangements are consistent with the arrangements for 'act of grace' payments set out in Division 4 of Part 4 of the Financial Management and Accountability Act 1999. Where applicable, however, section 73 of the new PS Act obviates the need to use the general 'act of grace' payments arrangements in cases relating to Commonwealth employment matters.

PSA 1999 Advice Number 30 further indicates at paragraph 18 that where there is not a clear case of defective administration or legal liability and the agency head considers that special circumstances exist, payment may be made under section 73 of the PSA 1999.

Reasons for decision

Whether a receipt of money received is to be included in your assessable income in any year is determined by whether it falls for consideration under section 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997).

Section 6-5 of the ITAA 1997 provides that your assessable income includes income according to ordinary concepts, which is called ordinary income.

Section 6-10 of the ITAA 1997 provides that your assessable income also includes some amounts which are not ordinary income. This is called statutory income.

An 'act of grace' is not defined in tax law and it therefore falls to the dictionary definition which is:

A payment by a government to a citizen with whom it is in dispute to avoid protracted litigation, although the government is not legally liable.

An act of grace payment may be described as a special "gift of money" by the Commonwealth. It is not an alternative to other means of redress, but a remedy in special cases to ensure consistency and equity in the impact of Government activities.

An act of grace payment may be appropriate in circumstances such as where:

· the application of legislation produces unintended, anomalous, inequitable, unjust or otherwise unacceptable results in the particular circumstances

· the matter is not covered by legislation but it is intended to introduce such legislation and it is considered desirable in the particular case to apply the benefits of the proposed legislation retrospectively by act of grace, or

· the particular circumstances of the case lead to the conclusion that there is a moral obligation on the Commonwealth to make a payment.  

An act of grace payment is not made simply because the claimant's circumstances appear to meet one of these categories. There must also be a moral obligation on the Commonwealth to further satisfy the claimant's complaint, together with grounds outside the scope of the other forms of compensation that warrant the payment of compensation. The Commonwealth need not have been "at fault" for a moral obligation to exist.

In your case, it seems clear that under the compensation rules as administered by the payer, you had received all of your entitlement with the two payments made to you, notwithstanding that the payer did not deduct any income tax from one of the payments due to an internal error on their part.

The payer was therefore under no legal obligation to make any further payment to you but will make an 'act of grace' payment to compensate you for the tax debt that has arisen in your assessment due to their failure to deduct the correct amount of tax. In this regard the payer has conceded that they have a moral obligation to correct an error on their part that has had a detrimental effect on you.

The 'act of grace' payment is not income according to ordinary concepts because you had already been paid the full amount of your entitlement and therefore the payment could not be said to be expected, earned, relied upon and have an element of periodicity, recurrence or regularity which have been established as the traits of ordinary income.

It also does not fall within one of the categories of statutory income set out in section 10-5 of the ITAA 1997.

It is therefore considered that the 'act of grace' payment, in your particular circumstances, does not represent income according to ordinary concepts as required by section 6-5 of the ITAA 1997 or statutory income as required by section 6-10 of the ITAA 1997.

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