Edited version of private ruling

Authorisation Number: 1011604528084

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Ruling

Subject: Compensation payment

1. Is the compensation payment you received assessable?

No.

2. Are you liable to capital gains on your compensation payment?

No.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

The scheme that is the subject of this ruling

You have received an out of court settlement for damages for hurt and humiliation.

The deed of release finalises all claims from both parties in this matter.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 118-37.

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income). 

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: 

· are earned

· are expected

· are relied upon, and

· have an element of periodicity, recurrence or regularity.

Whether a lump sum compensation payment is income or capital depends on what the amount was designed to compensate the plaintiff for.

Taxation Ruling IT 2424 discusses compensation payments in respect of unlawful acts of discrimination. At paragraph 8 it states: 

a payment to compensate for personal injury, injury to feelings, humiliation, embarrassment, depression, anxiety, etc. is not liable for income tax. It is a payment of a capital nature. Nor is the payment liable to tax under the capital gains tax provisions by reason of the exemption provided in subsection 160ZB(1) (section 118-37 ITAA 1997) for compensation or damages paid for wrong or injury suffered by a taxpayer to his or person or in his or her profession or vocation.'

Paragraph 24 states:

A compensation payment received by way of settlement or under a determination of the Commission in respect of an unlawful act of dismissal qualifies as an eligible termination payment. Essentially, the compensation payment for unlawful dismissal, like a payment for wrongful dismissal settled or awarded under a common law action, is considered to be made in consequence of the termination of any employment of the taxpayer.

In your case, you were dismissed from your employment. You received a payment for general damages with regards to hurt and humiliation you suffered.

As the reason for the compensation payment was not for wrongful dismissal, the payment is not an eligible termination payment.

The payment does not have the characteristics of ordinary income. As the settlement is an un-dissected payment for general damages caused through hurt and humiliation, the amount is considered to be a capital payment and not assessable under section 6-5 of the ITAA 1997.

The disposal of an asset gives rise to a capital gains tax (CGT) event. However, paragraph 118-37(1)(b) of the ITAA 1997 disregards payments or receipts for the purposes of CGT where the amount relates to compensation or damages you receive for any wrong, injury or illness you suffer personally. As such, CGT implications with regards to the payment are disregarded.