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Edited version of your written advice
Authorisation Number: 1051205378246
Date of advice: 31 July 2017
Ruling
Subject: Compensation
Questions and Answers
1. Is the compensation of $X you received for loss of past and future earnings assessable?
Yes.
2. Is the interest of $X you received in compensation for not receiving those earnings at that time assessable?
Yes.
3. Is the pecuniary penalty of $X paid to a third party assessable?
No.
This ruling applies for the following period(s)
Year ended 30 June 2017
The scheme commences on
1 July 2016
Relevant facts and circumstances
You were in paid employment.
You were stood down from performing any further duties.
A third party (the applicant) took legal on your behalf seeking compensation for loss of wages (including interest) and for future loss.
The third party as Applicant also sought a pecuniary penalty.
The court ordered that your employer:
1. Pay you the sum of $X in compensation for loss of past and future earnings.
2. Pay you pay the sum of $X in interest to compensate you for not receiving those wages at that time.
3. Pay the third party a pecuniary penalty of $X as the Applicant in the judgement.
Reasons for decision
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.
Ordinary income has been held to include income from providing 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
● are expected or relied upon
● have an element of periodicity, recurrence or regularity
● replace income.
Payments of salary and wages are income according to ordinary concepts and are included in assessable income under section 6-5 of the ITAA 1997.
An amount paid to compensate for loss generally acquires the character of that for which it is substituted (FC of T v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (FC of T v. Inkster (1989) 20 ATR 1516; 89 ATC 5142; Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641; Case Y47 (1991) 22 ATR 3422; 91 ATC 433).
Taxation Determination TD 93/58 outlines the circumstances under which the receipt of a lump sum compensation/settlement payment is assessable as ordinary income. The determination states that where the compensation payment is for loss of income, the amount is assessable as ordinary income. Where a portion of a lump sum payment is identifiable and quantifiable as income, that portion of the payment will be assessable.
In your case, you received the sum of $X in compensation for loss of past and future earnings. The amount paid to compensate for loss of earnings is assessable as ordinary income under subsection 6-5(2) of the ITAA 1997 in the income year it was received.
You also received the sum of $X in interest to compensate you for not receiving those wages at an earlier time. As already stated, a compensation amount generally bears the character of that which it is designed to replace. If the compensation is paid for the loss of income, then it will be regarded as ordinary income. As the payment of $X is compensating you for not receiving income that would have been assessable income had it been paid at an earlier time, this payment is therefore treated as also being assessable income and must be included in your income tax return in the year that you received the payment.
The judge ordered the pecuniary penalty of $X to be paid to the third party as the Applicant in the judgement. As you did not receive this amount, it is not assessable to you and you do not include it in your assessable income.
The rulings in the register have been edited and may not contain all the factual details relevant to each decision. Do not use the register to predict ATO policy or decisions.
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