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Ruling

Subject: Compensation

Question 1

Are you assessable on the compensation payment you will receive?

Answer

No.

Question 2

Will any capital gains arising from the compensation payment be disregarded?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

You worked for college A for a number of years prior to superannuation becoming compulsory.

You were invited to join the superannuation scheme which you subsequently did.

You were appointed to another position at college B.

When you left college A, you learned that you would not receive the employer superannuation contributions as these would remain in the fund for the benefit of all other members.

You were never told that you would not receive the employer contributions if you transferred to another college.

You consider you have been wronged and are seeking redress from college A.

You have been offered an ex-gratia payment which you may accept or you may ask for a higher amount.

Relevant legislative provisions

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

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

Reasons 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.  

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.  

In your case, the payment you will receive will not be from rendering personal services, income from property or income from carrying on a business. Although the payment may be expected and relied upon, it will not be earned and will be received in a lump sum. Therefore, the payment you have been offered is not assessable as ordinary income.

Capital gains tax (CGT)

Amounts received in respect of personal injury which are not direct compensation for loss of income will usually be capital in nature and are potentially taxable as statutory income under the CGT provisions of the ITAA 1997.

Taxation Ruling TR 95/35 deals with the capital gains treatment of compensation receipts. The ruling advocates a 'look-through' approach, which identifies the most relevant asset to which the compensation amount is most directly related. Paragraph 11 of TR 95/35 states that if an amount is not received in respect of an underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation.

However, paragraph 118-37(1)(b) of the ITAA 1997 disregards a capital gain made from a CGT event where the amount relates to compensation or damages received for any 'wrong, injury or illness you suffer personally'. Therefore, any capital gain that may arise from the receipt of the lump sum payment for the wrong you suffered will be disregarded.