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This edited version has been archived due to the length of time since original publication.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: 1012856467200

Date of advice: 7 August 2015

Ruling

Subject: Assessable income

Question

Is the compensation payment you received included in your taxable income?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2015

The scheme commences on

1 July 2014

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

You lodged an objection over a dispute with a government agency.

As part of the process documentation was provided to a third party, which breached your privacy.

You lodged a privacy breach compensation claim.

The government agency offered $X to settle the complaint.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 118-37

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 3 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.

The compensation you received was not income from rendering personal services, income from property or income from carrying on a business. The payment is also a one off payment and thus it does not have an element of recurrence or regularity. We do not consider that the payment is assessable as ordinary income under section 6-5 of the ITAA 1997.

Capital gains tax

Under section 108-5 of the ITAA 1997 an asset for capital gains tax (CGT) purposes is any form of property or a legal or equitable right that is not property. Under section 102-20 of the ITAA 1997 you make a capital gain or capital loss as a result of a CGT event.

Section 104-25 of the ITAA 1997 provides that CGT event C2 happens if the ownership of an intangible CGT asset, such as the right to seek compensation, ends by the asset:

(a) being redeemed or cancelled

(b) being released, discharged or satisfied

(c) expiring; or

(d) being abandoned, surrendered or forfeited

The time of the event is when you enter into the contract, that results in the asset ending or if there is no contract, when the asset ends.

Under section 118-37 of the ITAA 1997, a capital gain or loss you make from a CGT event relating directly to any wrong, injury or illness you suffer personally is disregarded.

Taxation Ruling TR 95/35 discusses the CGT implications for compensation receipts. Example 12 provides that a compensation payment for breach of privacy would be exempt by virtue of subsection 160ZB(1) of the Income Tax Assessment Act 1936 (rewritten as section 118-37 of the TIAA 1997).

In this case, CGT event C2 would have occurred when you entered into the settlement arrangement and you disposed of your right to seek compensation. However, any capital gain or loss can be disregarded under section 118-37 of the ITAA 1997 as the event related directly to a wrong that you suffered personally. Therefore, the compensation payment will not be included in your taxable income.

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