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Edited version of your private ruling
Authorisation Number: 1012346632004
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Ruling
Subject: Income - lump sum
Question 1:
Is the lump sum amount paid to you as a grievance payment assessable as ordinary income for the year ended 30 June 2012?
Answer:
No
Question 2:
Can you disregard any capital gain or loss that has resulted from the grievance payment that you received?
Answer:
Yes
This ruling applies for the following period
Year ended 30 June 2012
The scheme commenced on
1 July 2011
Relevant facts
You made a Grievance against your employer.
You agreed to settle the Grievance on the terms and conditions in the Deed.
You received a one off lump sum amount as part of the Deed of settlement and release.
The payment was not dissected and was paid by your employer.
In accepting the payment you agreed to withdraw your complaint with the Ombudsman.
The lump sum was not paid for loss of income but was a Grievance payment for a number of complaints you made against your employer.
Assumptions
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 6-5
Income Tax Assessment Act 1997 Section 6-10
Income Tax Assessment Act 1997 Paragraph 118-37
Reasons for decision
Ordinary income
Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes income according to ordinary concepts (ordinary income).
Based on case law, it can be said that ordinary income generally includes receipts that:
· are earned
· are expected
· are relied upon, and
· have an element of periodicity, recurrence or regularity
A compensation amount generally bears the character of that which it is designed to replace. Compensation payments which substitute income have been held by the courts to be income under ordinary concepts.
The payment you received was not made as compensation for any loss of income. You received the payment as a result of a number of complaints you lodged against your employer and you were paid a Grievance payment.
The lump sum amount does not have characteristics of ordinary income. The payment did not actually replace any actual or notional lost income. The payment was a one-off payment and thus did not have an element of recurrence or regularity. The payment was neither expected nor relied upon.
Accordingly, the lump sum amount is not considered ordinary income and will not be assessable under section 6-5 of the ITAA 1997.
Statutory income
Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. Compensation payments that are capital in nature are potentially taxable as statutory income under the capital gains tax (CGT) provisions of the ITAA 1997.
However, paragraph 118-37 (1) (b) of the ITAA 1997 operates to disregard any capital gain made from a CGT event relating directly to compensation or damages received for any wrong or injury suffered.
In your situation, the payment you received was not compensation for loss of income, but rather to compensate you for a number of complaints you had against your employer. As the payment was made to compensate you for a personal wrong, it is exempt from CGT as set out in paragraph 118-37(1) (b) of the ITAA 1997.
Therefore, the lump sum amount is not assessable as statutory income under section 6-10 of the ITAA 1997.
As the lump sum is not ordinary or statutory income, it should not be included as part of your assessable income.
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