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Edited version of private advice
Authorisation Number: 1051530684133
Date of advice: 19 June 2019
Ruling
Subject: Ex gratia payment
Question
Is the 'ex gratia' payment received from your employer included in your assessable income?
Answer
Yes.
This ruling applies for the following period:
Year ending 30 June 2019
The scheme commences on:
1 July 2018
Relevant facts and circumstances
You made claims against your employer in relation to underpayment of various income amounts such as for allowances and overtime.
Your employer accepted that they had underpaid you income but for an amount less than what you had claimed.
They offered to settle your claims in return for payment of the underpaid income they had calculated plus an 'ex gratia' payment.
You accepted their settlement offer and entered into a Deed of Release.
The payments were for full and final settlement, satisfaction and discharge of all claims.
The Deed of Release contained a clause providing that your employer reserved the right to recover the 'ex gratia' payment should you fail to maintain your confidentiality obligations under the agreement.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5
Reasons for decision
Section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes ordinary and statutory income derived directly and indirectly from all sources during the income year.
An ex gratia payment is one that is given as a favour or gift.
The term 'gift' is not defined in the ITAA 1997. Therefore, the word 'gift' takes its ordinary meaning. Rather than attempting to define a 'gift', the courts have described a gift as having the following characteristics and features:
- There is a transfer of the beneficial interest in property
- The transfer is made voluntarily
- The transfer arises by way of benefaction, and
- No material benefit or advantage is received by the giver by way of return.
After considering the full circumstances of your ex gratia payment it is considered that the payment is not a true 'gift', but rather paid to you to settle your underpayment dispute with your employer. When you signed the Deed of Release you entered into an agreement with your employer to release them from all claims relating to the dispute. The confidentiality clause of the Deed of Release states your employer reserves the right to recover the ex gratia payment if you fail to maintain the confidentiality of the contents of the deed. Therefore the ex gratia payment is not considered a 'gift'.
In any case, ATO Interpretative Decision 2003/263 demonstrates that an 'ex gratia' payment can be considered income. In that ATO Interpretative Decision the payer had no obligation to make the payment that they did but it was considered to be income of the recipient as the payment was meant to substitute for part of the recipient's salary.
Taxation Determination TD 93/58 states that a lump sum compensation or settlement payment is included in assessable income if the payment is in relation to claims for loss of income only.
In your case, all your claims against your employer were in relation to underpayment of income. You did not make any claims of a non-income nature.
As all your claims were in relation to income, any amount you received as a result of making those claims is considered to be income. Therefore, the 'ex gratia' payment is included in your assessable income.
Even if the 'ex gratia' payment was not considered to be ordinary income, it would be assessable as a capital gain. This is because your right to sue your employer was a capital gains tax (CGT) asset and the 'ex gratia' payment is part of the capital proceeds you received for surrendering that asset when you settled your claims with your employer. However, as the 'ex gratia' payment is already included in your assessable income as ordinary income, you do not have to also include an amount in relation to the payment as a capital gain.
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