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Edited version of private ruling
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Ruling
Subject: Compensation income
Question
Is the compensation payment you received assessable?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2010
The scheme commenced on
1 July 2009
Relevant facts
You are a franchisee of the franchisor.
As the result of a class action on behalf of the franchisees of the franchisor, you received a payment.
In the statements of claim, the damages sought was for the loss of a share of bonuses, share of rebates and the amount of charges imposed, fines and additional payments required by the franchisor which were deducted from payments due.
As per the court order, total sum awarded was distributed based on the amounts that were not distributed to the franchisees.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Reasons for decision
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
Based on case law, it can be said that ordinary income generally includes receipts that:
· are earned
· are expected
· are relied upon
· have an element of periodicity, recurrence or regularity.
Payments of bonuses and rebates are income according to ordinary concepts and are included in assessable income under section 6-5 of the ITAA 1997.
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).
In your case, you received a payment to compensate you for amounts not distributed to you as a franchisee. These amounts are considered to be income in nature and would be assessable to you under section 6-5 of the ITAA 1997. The amount of compensation substituted these amounts, acquiring their character. Accordingly this compensation payment is included in your assessable income.