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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your written advice

Authorisation Number: 1012799865500

Ruling

Subject: Assesability of compensation payment

Questions

Advice/Answers

This ruling applies for the following period

Year ending 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts and circumstances

You commenced employment on date earlier than recorded by your employer.

Consequently, you received a settlement from your former employer regarding any potential future claims as to unpaid superannuation.

This settlement offer was calculated on the basis that you obtained permanent employment with your employer on the earlier date than that they recorded.

At the time of receiving the compensation amount you were no longer contributing to the relevant superannuation fund and you had accessed the retirement benefits. Therefore the payment could not be backdated and paid into the fund, and you were paid a settlement sum to compensate for loss of employer funded benefit.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 307-5.

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Paragraph 104-25(1)(a)

Income Tax Assessment Act 1997 Paragraph 104-25(5)(a)

Income Tax Assessment Act 1997 Subsection 109-5(1)

Reasons for decision

Subsection 307-5 (1) of the ITAA 1997 defines a superannuation benefit as a payment described in the following table.

Therefore, as subsections 307-5 (1), (2), or (3) of the ITAA 1997 have not been satisfied, the payment is not considered to be a superannuation benefit.

Assessable income for the purposes of ordinary income?

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (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 unless the payment is capital in nature.

Whether the proceeds of a compensation payment are capital or revenue depends on what the compensation payment is intended to replace. Generally, a payment will be on revenue account if it is intended to replace another amount which would have been income. It is therefore necessary to distinguish between compensation for loss of income on the one hand and compensation for the loss of the ability to produce income or the right to receive the income on the other.

A payment will be compensation for a loss in earning capacity where the taxpayer has a reduced capacity to earn income and the payment is made in respect of that loss. A payment will be compensation for a loss in income where the taxpayer has suffered a loss in earning capacity, either temporary or permanent, but the compensation is paid in respect of the loss of income only (Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; 89 ATC 5142, 1989 20 ATR 1516).

From the information you have provided we have concluded that the payment was compensation for incorrect advice which resulted in the loss of the capacity to earn income in the form of superannuation benefits. As the capacity to earn income is considered to be a capital asset the payment is considered to be capital in nature and thus not assessable under section 6-5 of the ITAA 1997.

Capital gains tax

Section 6-10 of the ITAA 1997 provides that amounts other than ordinary income are included in your assessable income where those amounts are treated as assessable income by other provisions of the income tax law. Section 102-5 of the ITAA 1997 provides that capital gains are included in assessable income. Therefore, any net capital gain that you make is included in your assessable income in the year of income that the gain is made, unless it is covered by one of the exemptions.

Paragraph 104-25(1)(a) of the ITAA 1997 provides that CGT event C2 happens if a taxpayers ownership of an intangible CGT asset ends because it is redeemed or cancelled.

The relevant CGT asset in your case is your right to seek damages for the incorrect advice. When the Deed of Release was executed with your employer your right to seek damages were cancelled or terminated, CGT event C2 relating to cancellation, surrender and similar endings, happened to your right to seek damages.

Was an asset acquired before 20 September 1985?

Paragraph 104-25(5)(a) of the ITAA 1997 provides that a capital gain or capital loss you make is disregarded if you acquired the asset before 20 September 1985. Under subsection 109-5(1) of the ITAA 1997, a taxpayer generally acquires a CGT asset when they become its owner.

You acquired the right to seek damages at the time you received the incorrect advice. As this advice was provided prior to 20 September 1985 the capital gain is disregarded.

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