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Edited version of your private ruling
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Ruling
Subject: Settlement payment
Question
Is the settlement amount you received as compensation for your costs, assessable income?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2011
The scheme commences on:
1 July 2010
Relevant facts and circumstances
You received a settlement payment as compensation for certain costs incurred by you.
The money was to settle a dispute you had.
You have been claiming deductions for the costs that the settlement payment relates to.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-10,
Income Tax Assessment Act 1997 Section 20-20 and
Income Tax Assessment Act 1997 Subsection 20-20(2).
Reasons for decision
Summary
The settlement payment you received is assessable income. The payment is considered an assessable recoupment as it was received by way of indemnity and you can claim a deduction, and have claimed a deduction, for the loss or outgoing to which the payment relates.
Detailed reasoning
Section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a taxpayer's assessable income also includes statutory income. Statutory income is amounts that are not ordinary income but are included in assessable income by another provision. One such provision is section 20-20 of the ITAA 1997 which deals with assessable recoupments.
Subsection 20-20(2) of the ITAA 1997 provides that an amount received by way of insurance or indemnity is an assessable recoupment if:
· you can claim a deduction for the loss or outgoing for the current year; or
· you have deducted or can deduct an amount for it in an earlier income year.
While 'indemnity' has no statutory definition, its ordinary meaning, taken from The Macquarie Dictionary (Multimedia) version 5.0.0,-01/10/01, includes compensation for damage or loss sustained.
In your case, you received a settlement payment. The payment was compensation for certain expenses you have sustained. You have therefore received an amount by way of indemnity.
You have claimed a deduction in earlier income years for the expenses to which the settlement payment relates.
Therefore, as you have received an amount by way of indemnity for a loss or outgoing that you have claimed a deduction for, we consider that the settlement payment you received is an assessable recoupment under section 20-20 of the ITAA 1997.