Edited version of private ruling

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Ruling

Subject: Assessability of compensation payment

Questions 1

Is the lump sum compensation payment you received ordinary income?

Answer

No.

Question 2

Is the lump sum compensation payment you received statutory income?

Answer

Yes.

Question 3

Do the capital gains tax provisions apply to the lump sum compensation payment?

Answer

Yes.

Question 4

Is any capital gain or capital loss in relation to the lump sum compensation payment disregarded?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

Your employment position was made redundant.

You believed you were discriminated against on the basis of family responsibilities.

You suffered overwhelming anxiety, hurt and devastation as a result.

You lodged a complaint of discrimination under a state anti-discrimination act.

The Anti-Discrimination Commission accepted that you were discriminated against on the basis of family responsibilities.

You were paid an amount in the settlement for hurt and humiliation.

The settlement was not for lost wages and/or future loss of wages.

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 10-5

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 118-37

Reasons for decision

Ordinary income

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.

Ordinary income has generally been held to include 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.

Compensation receipts which substitute for income have been held by the courts to be income under ordinary concepts.

Taxation Determination TD 93/58 Income Tax: under what circumstances is the receipt of a lump sum compensation/settlement payment assessable? explains that only lump sum settlements representing compensation for losses of an income nature will be assessable 'according to ordinary concepts'.

In your case, you received a lump sum compensation payment. This payment contains no specific element to compensate you for lost income. The payment constitutes a capital payment to compensate for your personal injury.

The payment was not related to personal services rendered, income from property or income from carrying on a business. It was not earned and does not have the elements of periodicity, recurrence or regularity. It may have been expected to some extent but could not be said to be relied upon. It does not have the characteristics of ordinary income.

Consequently, the payment you received is not assessable as ordinary income under section 6-5 of the ITAA 1997.

Statutory income

Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision of the tax law.

Section 10-5 of the ITAA 1997 lists those other provisions and included in this list are capital gains.

In your circumstances, capital gains tax (CGT) is most relevant and needs to be considered in more detail.

Paragraph 108-5(1)(b) of the ITAA 1997 specifically includes a legal or equitable right within the definition of a CGT asset. Therefore, a taxpayer's right to seek compensation is classified as an intangible CGT asset.

Section 104-25 of the ITAA 1997 discusses CGT event C2 which refers to cancellation, surrender and similar endings. Subparagraph 104-25(1)(d) of the ITAA 1997 states, in part, that CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being surrendered or forfeited.

Paragraph 3 of Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts confirms that the right to seek compensation is a CGT asset. It states that it is the right of action arising at law or in equity and vesting in the taxpayer on the occurrence of any breach of contract. It is acquired at the time of the compensable wrong and is disposed of when it is satisfied, surrendered, released or discharged.

Section 118-37 of the ITAA 1997 provides that certain capital gains or capital losses are disregarded. Paragraph 118-37(1)(a) of the ITAA 1997 provides that a capital gain or a capital loss you make from a CGT event which relates directly to compensation or damages received by you for any wrong or injury your suffer in your occupation is disregarded.

Paragraph 19 of TR 95/35 confirms that compensation received by an individual for any wrong or injury suffered to his or her person is disregarded from CGT under paragraph 118-37(1)(a) of the ITAA 1997.

In your case, the CGT event C2 happened when you received your compensation payment. However, any capital gain or capital loss you make will be disregarded under section 118-37 of the ITAA 1997 as the payment was received for personal injury suffered.

Consequently, the payment you received is not assessable as statutory income under section 6-10 of the ITAA 1997.

In conclusion, your lump sum compensation payment is not assessable as ordinary or statutory income. Therefore it does not need to be included as assessable income in your income tax return.