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Ruling
Subject: Income - Compensation payment
Question
Is your lump sum compensation payment considered to be assessable income in the financial year that it was received?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2011
Year ending 30 June 2012
The scheme commences on:
1 July 2010
Relevant facts and circumstances
You are involved in a business activity.
In a previous financial year there was an incident which resulted in a loss of income.
You have received a lump sum compensation payment for the loss of income as a result of the incident.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5,
Income Tax Assessment Act 1997 Subsection 6-5(2),
Reasons for decision
Summary
The lump sum compensation payment is considered to be ordinary income and was derived when it was received. Therefore, this amount is assessable income in the financial year that you received it.
Detailed reasoning
Subsection 6-5(2) of the Income Tax Assessment Act 1997 provides that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.
Ordinary income has been held to include income from providing 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:
o are earned
o are expected or relied upon
o have an element of periodicity, recurrence or regularity
o replace income.
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 under ordinary concepts (FC of T v. Inkster (1989) 20 ATR 1516; 89 ATC 5142; Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641; Case Y47 (1991) 22 ATR 3422; 91 ATC 433).
Taxation Determination TD 93/58 outlines the circumstances under which the receipt of a lump sum compensation/settlement payment is assessable as ordinary income. The determination states that where the compensation payment is for loss of income, the amount is assessable as ordinary income. Where a portion of a lump sum payment is identifiable and quantifiable as income, that portion of the payment will be assessable.
In your situation, the payment was compensation for loss of income and is therefore considered to be assessable as ordinary income.
Also, although the compensation payment related to loss of income during previous financial years, it is not considered to have been derived until it was received (Taxation Ruling TR 98/1).
Therefore, the compensation payment is assessable income in the financial year that you received it.