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Edited version of private ruling
Authorisation Number: 1011668879704
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Ruling
Subject: Assessability of compensation income
Is the compensation payment you received for weekly maintenance assessable?
Yes.
This ruling applies for the following period:
Year ended 30 June 2011
The scheme commenced on:
1 July 2010
Relevant facts and circumstances
You received a compensation payment.
The payment is the late payment of weekly maintenance payments.
The payment covers a period over two financial years.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Reasons for decision
Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income).
Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.
Other characteristics of income that have evolved from case law include receipts that:
· are earned
· are expected
· are relied upon, and
· have an element of periodicity, recurrence or regularity.
Delayed payment of weekly maintenance
In order to determine the taxation treatment of a compensation payment, the nature of the compensation payment must be examined, as a compensation amount generally bears the character of that which it is designed to replace (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 10 ATD 82; (1952) 5 AITR 443; (1952) 10 ATD 82).
Payment of salary and wages is income according to ordinary concepts and included as assessable income under section 6-5 of the ITAA 1997. The courts have held that amounts paid to compensate for a loss generally acquire the character of that for which they are substituted. Therefore compensation payments which substitute for loss of earnings are also income under ordinary concepts (Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; 89 ATC 5142; (1989) 20 ATR 1516 and Tinkler v. FC of T 79 ATC 4641; (1979) 10 ATR 411).
The compensation payment you received was for arrears of weekly payments. The weekly payments were to replace salary and wage income and are income according to ordinary concepts.
Therefore, the arrears payment you received for weekly maintenance is ordinary income and is therefore assessable under section 6-5 of the ITAA 1997.
Additional Note
Please note that you may be entitled to a lump sum in arrears offset in your 2011 year assessment. Whether an offset applies in your situation cannot be determined until you lodge your 2011 year return.
To be eligible for the lump sum in arrears tax offset a taxpayer must satisfy the following conditions:
1. the taxpayer must have received a lump sum payment of eligible income that accrued, in whole or in part, in an earlier year or years of income. Eligible income is defined in subsection 159ZR(1) of the Income Tax Assessment Act 1936 (ITAA 1936) to include income by way of compensation or sickness or accident pay that is:
· in respect of an incapacity for work
· calculated at a weekly or other periodical rate, and
· not made under a policy of insurance to the owner of the policy; and
2. the amount of the lump sum which accrued before the year of receipt must not be less than 10% of the taxpayer's normal taxable income of the year of receipt. Normal taxable income is defined in subsection 159ZR(1) of the ITAA 1936 to be taxable income less:
· the amount of the eligible lump sum that accrued in earlier years
· abnormal income (generally income of certain professionals, such as artists or sportspeople, that is subject to averaging)
· net capital gains
· eligible termination payments, and
· lump sum payments on termination of employment in lieu of annual leave or long service leave.
The amount of the lump sum in arrears tax offset to which a taxpayer may be entitled is calculated in accordance with sections 159ZRB to 159ZRD of the ITAA 1936. The tax offset amount is effectively the difference between the tax payable on the lump sum in the year of receipt, and the tax that would have been paid had it been taxed as it accrued.
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