Edited version of private ruling

Authorisation Number: 1011840932259

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Ruling

Subject: Ex-gratia payment

Question 1

Is the lump sum ex-gratia payment that you received assessable income?

Answer

Yes.

Question 2

Is any amount of the ex-gratia payment able to be disregarded?

Answer

No.

This ruling applies for the following period:

1 July 2011 - 30 June 2012

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You were involved in an incident in relation to your employment.

You subsequently lodged a complaint for compensation.

The outcome that you were seeking from the complaint was,

· Compensation for loss of earnings, and

· Compensation for pain and suffering.

You employer agreed to settle your complaint.

The payment is to be made in a lump sum and cannot be broken down into individual components for economic or non economic loss.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5,

Income Tax Assessment Act 1997 Section 102-20,

Income Tax Assessment Act 1997 Section 104-25,

Income Tax Assessment Act 1997 Section 108-5,

Income Tax Assessment Act 1997 Section 110-25, and

Income Tax Assessment Act 1997 Paragraph 118-37(1)(a).

Reasons for decision

Question 1

Assessable income

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 3 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 includes receipts that:

· are earned,

· are expected,

· are relied upon, and

· have an element of periodicity, recurrence or regularity.

The compensation you received was not income from rendering personal services, income from property or income from carrying on a business.

The payment is also a one off payment and thus it does not have an element of recurrence or regularity.

A compensation amount generally bears the character of that which it is designed to replace. If the compensation is paid for the loss of a capital asset or amount then it will be regarded as a capital receipt and not ordinary income.

You received compensation for the loss of a capital asset; that is the right to pursue compensation. Therefore, the compensation is a capital receipt and is not ordinary income and as a result is not assessable under section 6-5 of the ITAA 1997.

Capital gains tax

Capital gains tax (CGT) is the tax you pay on certain gains you make. You make a capital gain or capital loss as a result of a CGT event happening to an asset in which you have an ownership interest.

A CGT asset is any kind of property; or a legal or equitable right that is not property.

CGT event

Compensation received as an un-dissected lump sum is treated as being consideration received for the disposal of the right to seek compensation. The right to seek compensation is a CGT asset.

When you receive an amount of money as a result of a judgement from a court action or you receive an amount of money for settling your dispute out of court, you are disposing of an asset which is the right to seek compensation and CGT event C2 occurs.

In your case, a CGT event C2 occurs when there has been a release, discharge or satisfaction of the right.

For most CGT events the capital proceeds are the money you receive or are entitled to receive from the event. In your case, the capital proceeds will be the total of the compensation you receive.

Exemption for personal injury

However, in some cases, an exemption may apply which will allow a taxpayer to disregard any capital gain or capital loss made from a CGT event. A capital gain or capital loss may be disregarded if it is made from a CGT event that relates directly to compensation or damages received for any wrong or injury you suffer in your occupation.

This exemption is available if a taxpayer receives compensation in an un-dissected lump sum which relates wholly to the personal wrong or injury suffered by the taxpayer. However, if compensation is received by a taxpayer in a lump sum paid in settlement of a number of claims, including a personal injury claim, and its individual components cannot be determined or reasonably estimated, no part of the compensation can be quantified as relating to the personal injury of the taxpayer. In these cases, the exemption would not apply to any part of the compensation received.

In your case, you will receive an un-dissected lump sum payment. This payment will be made to you on the condition of you withdrawing your complaint. The outcome that you were seeking from the original complaint was compensation for the loss of earnings and pain and suffering. However, there has been no actual dissection of the compensation amount that you will receive. As a result, no part of the payment can be quantified as relating to a wrong or injury you suffered in your occupation. Therefore, the exemption is not available to you and any capital gain or loss made as a result of the payment cannot be disregarded.

Please note:

The cost base of the asset is the sum of money and the market value of any property given as consideration for the creation of the asset. This would include any legal fees incurred in respect