Edited version of private advice

Authorisation Number: 1052283538438

Date of advice: 02 August 2024

Ruling

Subject: Lump sum - court ordered compensation

Question 1

Is the lump sum payment you received under a court order due to an unlawful and unreasonable action committed by your employer, that corresponds to your owed wages pursuant to your employment contract, assessable income under section 6-5 or section 15-2 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes.

Question 2

Can you claim a deduction for time and effort spent in preparing court proceedings relating to an unlawful and unreasonable action committed by your employer that caused you to suffer financial loss, under section 8-1 of the ITAA 1997?

Answer 2

No.

Question 3

Is the lump sum payment amount, that your employer advised corresponds to your superannuation contributions you received under a court order against your employer, assessable income under section 6-5 or section 15-2 of the ITAA 1997?

Answer 3

Yes.

Question 4

Is the lump sum payment amount, that your employer advised corresponds to your leave you received under a court order against your employer, assessable income under section 6-5 or section 15-2 of the ITAA 1997?

Answer 4

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You work for an employer.

You were stood down without pay due to a dispute with your employer.

You initiated court proceedings against your employer alleging that you were placed on leave without pay for no lawful basis and sought to recover lost salary and entitlements during the period you were placed on leave without pay.

Throughout the court proceedings, you self-represented yourself and did not incur legal expenses.

The court found the actions of your employer to be unlawful and unreasonable and ordered them to pay damages in a lump sum.

Your employer paid the entire lump sum amount directly to you.

Your employer sent an email to explain their breakdown of the lump sum, which you agreed with, such that a part of it corresponds to your owed salary, a part corresponds to employer superannuation contributions, a part corresponds to your leave balance, and the rest captures cost orders, filing fees, service fees and interest.

Your employment with your employer was not terminated nor did you resign. You continue to work for your employer.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 15-2

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Question 1

The lump sum payment you received under a court order for your owed wages is assessable income.

Detailed reasoning

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that assessable income includes income according to ordinary concepts. Ordinary income is not clearly defined in the legislation and whether an item is ordinary income is determined by examining the whole circumstances of a particular case, having regard to the propositions and indicia developed or recognised by the courts. There is no definitive test to determine whether an item is ordinary income.

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. Subsection 15-2 of the ITAA 1997 provides that assessable income includes income allowances, gratuities, compensation, benefits, bonuses and premiums provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you.

A payment to compensate for a loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540) i.e. the replacement principle applies. Under the replacement principle, an item is on revenue account if it is received as a replacement for an item that would have had the character of income had it been received. Taxation Determination TD 93/58 considers that the receipt of a lump sum compensation or settlement payment is assessable as ordinary income if the payment is compensation for loss of income only.

For example, the Federal Court of Australia in Poletti v. Ecob (No. 2) (1989) 31 IR 321 gave a direction for the payment of an under payment of wages where the appellant (employer) had provided the respondent (employee) a package of benefits rather than the salary or wages as required by the relevant award. Where a Court gives an order concerning payment of under paid wages, the amounts awarded are assessable income of the employee under either section 6-5 or 6-10 of the ITAA 1997.

Application to your circumstances

The Commissioner's view on compensation payments for loss of salary and wages is given in ATO Interpretative Decision ATO ID 2002/540. You received a lump sum compensation payment from your employer for lost salary and entitlements. The payment was made to compensate for earnings you otherwise would have derived in the course of your employment. Your payment was ordered by the court for underpayment of wages and therefore acquires the characteristics of ordinary income even though it was paid as a lump sum and is therefore assessable under section 6-5 or section 15-2 of the ITAA 1997.

Question 2

You cannot claim a deduction for time and effort spent in preparing court proceedings.

Detailed reasoning

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

Legal expenses incurred in recovering salary, wages and entitlements are considered to be of a revenue nature and deductible under s 8-1 (Taxation Determination TD 93/29) as they directly relate to gaining or producing assessable income (Interpretative Decision ID 2002/391). Examples of such expenses include solicitor's fees in pursuing the debt in court, court costs and costs associated with serving a legal process.

A loss or outgoing must be incurred by a taxpayer to deduct an amount. The terms "outgoing" and "loss" are not defined in either of the Income Tax Assessment Acts and so they take on their ordinary meaning. The term "outgoing," according to Hill J in FCT v Ogilvy and Mather Pty Ltd (1990) 21 ATR 841, contemplates that there be something that "flows out from the taxpayer." It may be a monetary payment or a liability. A loss includes where no payment is involved including bad debts written off (AGC (Advances) Ltd v FCT (1975) 5 ATR 243 ) or the theft of business takings (Charles Moore & Co (WA) Pty Ltd v FCT (1956) 95 CLR 34 ). Notably, both views from the courts provide for a quantifiable or numerical amount.

Application to your situation

You advised that you self-represented yourself and are seeking to deduct time and effort spent in preparing court proceedings. Time and effort are not a quantifiable outgoing or loss to incur and therefore you have not incurred a loss or outgoing.

Question 3

The lump sum payment amount that your employer advised corresponds to your superannuation contributions you received under a court order is assessable income.

Detailed reasoning

Under the Superannuation Guarantee (Administration) Act 1992 (SGAA), all employers must make sufficient superannuation contributions to a complying superannuation fund or retirement savings account for the benefit of their eligible employees by the prescribed due dates in the SGAA to avoid having to pay the SGC to the Tax Office.

Superannuation guarantee is an amount that must be paid by the employer to a superannuation fund, not directly to the employee. However, a cash payment you receive from your employer still holds its ordinary characterisation as salary or wages even if your employer has 'attributed' part of that lump sum cash payment as superannuation contributions.

It is the form that remuneration is paid to you that determines how and when you taxed on it.

Question 4

The lump sum payment amount that your employer advised corresponds to your leave you received under a court order is assessable income.

Detailed reasoning

As provided in our reasoning in Question 1, while the amount 'attributed' by your employer to your lost leave would not ordinarily be paid out directly to you, the payment was made to compensate for earnings and or leave you otherwise would have derived. It follows that the amount itself is considered salary and wages and assessable income.

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