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Edited version of your written advice

Authorisation Number: 1013106666976

Date of advice: 13 October 2016

Ruling

Subject: Assessable Income

Question 1

Does the lump sum payment you received as a result of signing the Deed of Release form part of your assessable income?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2017

The scheme commences on:

01 July 2016

Relevant facts and circumstances

You live in City A.

You were employed to work in City B.

Under a union negotiated award, you should have been paid a LAFHA while working at this site.

The allowance was not paid

Your employer paid a lump sum - based on the terms of the Deed of Release.

The Deed of Release states:- The Company does not concede the Employee is entitled to any LAFHA entitlement in accordant with clause xxxx.

Relevant legislative provisions

Income Tax Assessment Act 1997 (ITAA 1997) Section 6-5 (2)

Income Tax Assessment Act 1997 (ITAA 1997) Section 6-10

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

Reasons for decision

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.

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:

You have received a lump sum payment to settle action against your employer. You have not earned this payment as it does not directly relate to services performed. The payment is a one off payment and does not have an element or recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation arises from the lodgement of a law case, rather than a relationship with personal services performed.

Therefore, generally, the lump sum payment would not be considered ordinary income and would not be assessable under subsection 6-5(2) of the ITAA 1997.

However, Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income and are also included in assessable income.

A capital gain or loss is made if a capital gains tax (CGT) event happens. A capital gain occurs where a capital asset is disposed of for an amount greater than the cost base of the capital asset.

A right to seek compensation is an intangible CGT asset under section 108-5 of the ITAA 1997. CGT event C2 under section 104-25 of the ITAA 1997 happens when the ownership of an intangible CGT asset ends by the asset being satisfied or surrendered. In other words, the taxpayer receives the compensation payment.

The Commissioner does not consider that the lump sum payment you received under the Deed of Release is compensation for not receiving a LAFHA as:

It is considered that you are receiving the payment to settle the dispute and not take further action against the employer. In other words, you have received a payment for agreeing to give up your right to take further action and/or compensation.

Taxation Ruling TR 95/35 deals with the capital gains tax 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.

In your case as the payment received is not in respect of any underlying asset, the whole of the settlement amount is treated as capital proceeds from capital gains tax (CGT) event C2 happening to your right to seek compensation.

Therefore, the payment you have received is considered to be a capital payment and forms part of your assessable income.

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