Edited version of private advice

Authorisation Number: 1052351909292

Date of advice: 11 February 2025

Ruling

Subject: Assessable income

Question 1

Will a compensation payment received from a settlement be treated as assessable income?

Answer 1

Yes.

This ruling applies for the following period:

Year ended XX XXXX 20YY

Year ended XX XXXX 20YY

Year ending XX XXXX 20YY

The scheme commenced on:

XX XXXX 20YY

Relevant facts and circumstances

You are an Australian resident for tax purposes.

Your earliest engagement with Company A occurred on XX XXXX 20YY.

You were a technician providing technical services to Company A.

Your last engagement date with Company A occurred on XX XXXX 20YY.

In XXXX 20YY, the Court ordered compensation paid for underpaid wages.

The calculation of loss assessment formula set out within the distribution statement set out that your compensation component is based on the following entitlements:

•                     Ordinary wage amount of $XX

•                     Casual leave of $XX

•                     Total Overtime of $XX

•                     Total Allowances $XX

The total estimated distribution amount as set out by the terms of the settlement was XX.

You received the compensation payment over 3 payments as follows:

•                     On DD MM 20XX, you received $XX

•                     On DD MM 20XX, you received $XX

•                     On DD MM 20XX, you received $XX

•                     Total sum: $XX.

The compensation payments were made over several income years.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Reasons for decision

Your assessable income includes income according to ordinary concepts, which is called ordinary income (section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)).

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.

It has been determined that a frequent characteristic of income receipts is an element of periodicity, recurrence or regularity (FC of T v. Dixon (1952) CLR 540; (1952) 10 ATD 82). Other characteristics of income that have evolved from case law also include receipts that:

•                     The receipt is earned

•                     The receipt is expected

•                     The receipt is relied upon

•                     The receipt has an element of periodicity, recurrence or regularity; or

•                     The receipt is for the replacement of income.

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 according to ordinary concepts (FC of T v. Inkster 89 ATC 5142; (1989) 20 ATR 1516 and Tinkler v. FC of T 79 ATC 4641; (1979) 10 ATR 411).

Taxation Determination TD 93/58 Income tax: under what circumstances is the receipt of a lump sum compensation/settlement payment assessable? (TD 93/58) outlines the circumstances under which the receipt of a lump sum compensation or settlement payment is assessable as ordinary income. TD 93/58 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.

Your compensation payments are calculated for loss calculated based on ordinary wages, casual wages, overtime and total allowances. The compensation payment takes on the character for which it is substituted, therefore the total estimated amount for distribution is ordinary income that is assessable.

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