Edited version of your private ruling

Authorisation Number: 1012246799459

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Ruling

Subject: victim of crime compensation

Question 1

Is the loss of earnings grant you received assessable income?

Answer

Yes

Question 2

Are the special assistance, legal expense and report expense grants you received assessable income?

Answer

No

Question 3

Can you claim a deduction for a portion of the legal fees incurred in seeking the grants?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The relevant state authority received a financial assistance application from your lawyers in relation to a crime committed against you.

In 2012 you applied for a grant for assistance.

You received a grant payment from the state authority.

The grant in total comprised of four categories of payment:

· loss of earnings

· legal expenses

· report expense

· special assistance

You incurred legal expenses in seeking the grant payments.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1,

Income Tax Assessment Act 1997 Subsection 6-5 and

Income tax Assessment Act 1997 Subsection 6-5(2).

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.

Compensation for loss of income

An amount paid to compensate for loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 10 ATD 82; (1952) 5 AITR 443). Compensation payments that substitute for income have been held by the courts to be income under ordinary concepts (Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; 89 ATC 5142, (1989) 20 ATR 1516). The payment retains the character of ordinary income even though paid as a lump sum.

In your case, you were a victim of a crime.

As a result of this crime, you were paid a grant for financial assistance with:

· loss of earnings

· legal expenses

· report expenses

· special assistance

The loss of earnings payment is considered to be ordinary income as it was paid for loss of wages and it will be assessable under subsection 6-5(2) of the ITAA 1997.

However the payments you received for reasonable legal expenses, report expenses and special assistance are considered to be either capital or private in nature and are not assessable as ordinary 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.

The reasonable legal expenses, report expenses and special assistance payments you received are not included in your assessable income by another provision and are therefore not considered to be statutory income. Therefore these amounts are not assessable income.

Deduction for legal expenses

In determining whether a deduction for legal expenses is allowed under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered. The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses. If the advantage to be gained is of a capital or private nature, then the expenses incurred in gaining the advantage will also be of a capital or private nature.

The amount granted to you for loss of earnings is regarded as revenue, and legal expenses incurred in gaining this amount are deductible. The other grant payments you received are not of a revenue nature and the legal expenses incurred in gaining these payments are not deductible.

Thus, based on a reasonable apportionment, you will be entitled to a portion of your legal expenses. An acceptable method of apportionment would be to divide the revenue amount by the total grant (less the reasonable legal expense payment) and multiplying this amount by the net legal expenses.