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Ruling
Subject: Assessability of class action payment
Questions and answers
Are the compensation payments included in your assessable income?
No.
Are the interest payments included in your assessable income?
Yes.
This ruling applies for the following periods:
Year ending 30 June 2012
The scheme commenced on:
1 July 2011
Relevant facts and circumstances
You received a compensation payment and interest payments.
The compensation payment was in relation to your main residence.
Relevant legislative provisions:
Income Tax Assessment Act 1997 Section 6-5.
Reasons for decision
For a compensation payment to be assessable as income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) the payment must be income according to ordinary concepts.
Ordinary income has generally been held to include three categories:
· 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.
Generally, a compensation payment inherits the characteristics of the item for which the payment is made (Taxation Ruling TR 95/35). Accordingly, it is necessary to establish what you are being compensated for in order to determine whether the payment will form part of your assessable income. For example, if the compensation is paid in respect of a capital asset or amount then it is regarded as a capital receipt and not ordinary income.
Taxation Ruling TR 95/35 states that compensation for the permanent reduction in the value of a property which has not been disposed of will be treated as a recoupment of all or part of the acquisition cost of the asset. The receipt of this payment would result in the reduction of the cost base of the property by the amount of compensation received, as if those costs had not been incurred. No capital gain or loss arises in respect of that asset until the taxpayer actually disposes of the underlying asset.
In your case, as the payment is payable due to a loss of value, the cost base of your property will be reduced by the amount of compensation received. As the property is your main residence there will be no tax implications if you decide to sell the property as long as it remains your main residence for the whole of your ownership period.
You are not required to declare the compensation payment in your tax return.
Interest is ordinary income and is required to be declared in your tax return in the income year it is received.