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Edited version of private advice

Authorisation Number: 1012677579905

Ruling

Subject: Assessability of a compensation payment

Question 1

Is the settlement sum considered assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Is the settlement sum considered assessable income under Part 3-1 (CGT) of the ITAA 1997?

Answer

No

This ruling applies for the following period

Year ending 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts

You were employed.

Your employer engaged in wrongful conduct towards you personally and caused you to suffer wrong and injury in your profession and vocation and your employer destroyed your reputation and standing and capacity to obtain appointment to appropriate positions for the remainder of your career.

You commenced proceedings.

An Offer of Compromise was made.

You accepted the offer and both parties signed the agreement.

As outlined in the Settlement and Release Deed your employer agreed to pay an amount in satisfaction of your claim for damages and compensation for the wrong and injury suffered by you personally, in your profession and vocation, and for the destruction and loss of your reputation and standing depriving you of capacity to obtain appointment to appropriate positions for the remainder of your career.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Paragraph 118-37(1)(a)

Reasons for decision

Question 1

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 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, expected, relied upon and have an element of periodicity, recurrence or regularity.

In your case your employer agreed to pay you an amount to settle your claim for damages and compensation for the wrong and injury suffered by you personally in your profession and vocation and for the destruction and loss of your reputation and standing depriving you of the capacity to obtain appointment to appropriate positions for the remainder of your career.

The payment was not earned by you as it does not relate to services performed. The payment is also a one-off payment and thus it does not have an element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation does not arise from a relationship to personal services performed.

Accordingly, the payment is not ordinary income and is therefore not assessable under section 6-5 of the ITAA 1997.

Question 2

Taxation Ruling TR 95/35 deals with the capital gains treatment of compensation receipts. The ruling advocates a 'look-through' approach, which identifies the most relevant asset to which the compensation amount is most directly related.

Paragraph 11 of TR 95/35 states that if an amount is not received in respect of an underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation.

Here, as the amount received is not in respect of any underlying asset, the whole of the settlement amount is treated as capital proceeds from a capital gains tax (CGT) event happening to the right to seek compensation.

However, paragraph 118-37(1)(a) of the ITAA 1997 disregards a capital gain made from a CGT event where the amount relates to compensation or damages received for any 'wrong or injury you ... suffer in your occupation'. As such, CGT implications with regards to the payment are disregarded.

Conclusion

The settlement sum is not assessable as ordinary income however it is assessable as a capital gain but that gain is disregarded.

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