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Ruling

Subject: Assessability of compensation payment

Question and answer:

Is the compensation payment you received for recoupment of expenses under the Compensation for Detriment caused by Defective Administration scheme considered to be assessable income?

Yes.

Is the interest that you have received in relation to your compensation payment considered to be assessable income?

Yes.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

You lodged an appeal against a government department in regards of decision that was handed down.

At the conclusion of the review process you achieved a favourable outcome.

In pursuing the review you incurred additional costs.

Upon resolution you lodged a subsequent claim the recoup the additional costs that you incurred.

The government department made a counter offer in relation to your claim, which you accepted.

The payment that you received was dissected into expenses that were recouped and an interest component for delays in payment.

The payment for the recoupment of these expenses was made under the Compensation for Detriment caused by Defective Administration scheme (the CDDA scheme).

You have claimed a deduction for the expenses that you were compensated for under the CDDA scheme.

You received the payment in the current financial year.

Reasons for Decision

Assessable recoupment

Sections 6-5 and 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provide that your assessable income consists of income according to ordinary concepts, such as salary and wages, as well as other amounts that are included under alternative provisions of either the Income Tax Assessment Act 1936 (ITAA 1936) or ITAA 1997.

Section 10-5 of the ITAA 1997 lists the provisions about assessable income. Included in the list is Subdivision 20-A of the ITAA 1997 which deals with amounts received in the form of a recoupment for deductible losses or outgoings. A recoupment is defined in section 20-25 of the ITAA 1997 to include any kind of reimbursement, refund, insurance, indemnity or recovery (however described) and a grant in respect of the particular loss or outgoing.

A recoupment amount is only included in your assessable income if you receive the amount as an 'assessable' recoupment. Section 20-20 of the ITAA 1997 provides that an assessable recoupment will arise if you receive it for a loss or outgoing that you can deduct under a provision listed in section 20-30 of the ITAA 1997.

Subsections 20-30(1) and (2) of the ITAA 1997 provide tables of the deductions available for which recoupment's are generally assessable under Subdivision 20. Item 1.3 of the table listed in subsection 20-30(1) of the ITAA 1997 specifically includes tax-related expenses as an assessable recoupment.

In your case, you have incurred deductible expenses in pursuit of a favourable outcome in regards to a review that you lodged. You received a compensation payment under the CDDA scheme to compensate you for the expenses incurred. The expenses that were incurred are a deductible expense under section 20-30 of the ITAA 1997. Therefore the compensation payment that you have received is considered an assessable recoup under section 20-20 of the ITAA 1997.

Accordingly, the compensation payment that you have received to recoup expenses that you have incurred is assessable under section 20-20 of the ITAA 1997.

Interest

Subsection 6-5(2) of the ITAA 1997, provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts; provides the Commissioners view on the assessability of interest payments that are received as a result of a compensation payment.

Paragraph 26 states,

Interest awarded as part of a compensation amount is assessable income of the taxpayer under the general income provisions. If the taxpayer receives an undissected lump sum compensation amount and the interest cannot be separately identified and segregated out of that receipt, no part of that receipt can be said to represent interest. If the compensation cannot be dissected it is likely that the whole amount relates to the disposal of the right to seek compensation.

In your case, you have received a compensation payment that includes an amount of interest in relation to the delays in processing your payment. This interest component of the compensation payment has been dissected from the other elements of the payment and as such can be clearly identified.

Therefore, as provided in paragraph 26 of TR 95/35 the interest received from your compensation payment is considered to be ordinary income and as such assessable under section 6-5 of the ITAA 1997.

Section 118-37 of the ITAA 1997

In your request for a private ruling you have made reference to the capital gain provisions including section 118-37 of the ITAA 1997. Although if treated as a Capital receipt the compensation payment maybe a non-assessable payment under section 118-37 of the ITAA 1997, this provision will not exempt the compensation payment from being an assessable recoupment under section 20-20 of the ITAA 1997.

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