Edited version of private ruling

Authorisation Number: 1011623090958

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Ruling

Is a compensation payment received, because of defective administration, tax exempt?

No.

This ruling applies for the following period

1 April 2005 to 30 April 2008

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You lodged a registration form with Centrelink for the Pension Bonus Scheme deferring to claim Age Pension under the Social Security Act 1991.

You lodged forms to claim both Age Pension and Pension Bonus.

Centrelink decided not to pay you the Pension Bonus stating that you did not satisfy the Pension Bonus work test for a period.

You wrote to Centrelink and requested they review their decision that you were not eligible to receive the Pension Bonus.

The Authorised Review Officer (ARO), an independent senior officer authorised to review decisions made by Centrelink, confirmed you were not entitled to receive payment under the Pension Bonus Scheme.

You appealed to the Social Security Appeals Tribunal (SSAT) to review the decision made by the ARO.

The SSAT upheld the ARO's decision that you were not entitled to receive payment under the Pension Bonus Scheme.

You appealed to the Administrative Appeals Tribunal to review the decision made by the SSAT.

You signed a deed of release and indemnity agreeing to the sum of $xx.xx as complete satisfaction and settlement of all actions, suits, claims, costs and demands of any nature arising out of the incident, and any matter or thing connected with the incident.

The compensation payment is the equivalent amount of Age Pension you would have received for the period, taking your earnings over that period into account.

The AAT upheld the decision of the SSAT.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 159ZRA

Income Tax Assessment Act 1997 Subsection 6-5(2)

Reason for Decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

An amount paid to compensate for loss generally acquires the character of that for which it is substituted. 

Taxation Determination TD 93/58 explains that lump sum compensation is assessable income to the extent that it is identifiable and quantifiable as income. This will be possible where the parties either expressly or impliedly agree that a payment relates to a loss of an income nature. 

In your case, you received a defective administration compensation payment from Centrelink because of incorrect advice provided to you in respect to you eligibility for the Pension Bonus Scheme.

You signed a deed of release and indemnity agreeing to the sum of $xx.xx as complete satisfaction and settlement of all actions, suits, claims, costs and demands of any nature arising out of the incident, and any matter or thing connected with the incident.

The compensation payment of $xx.xx is equivalent to the amount of Age Pension you would have received for the period, when you continued to work and did not claim an Aged Pension in the belief you could claim a Pension Bonus. 

The compensation payment has the character of assessable income because it replaces income from this source. 

Therefore, the lump sum compensation payment you received from Centrelink, for defective administration, is assessable income under section 6-5(2) of the ITAA 1997.

Additional Information - Lump Sum Payment in Arrears Tax Offset

An individual taxpayer who receives a lump sum payment containing an amount that accrued in an earlier income year or earlier income years may be entitled to a tax offset under section 159ZRA of the Income Tax Assessment Act 1936 (ITAA 1936). This tax offset is known as a lump sum payment in arrears tax offset.

The tax offset is designed to alleviate the problem of more tax being payable in the income year in which the lump sum is received than would have been payable if the lump sum had been taxed in each of the income years in which it accrued.