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Ruling

Subject: Taxation of your settlement payment

Question 1

Will any part of your settlement amount be treated as assessable income?

Answer

No.

Question 2

Will any part of your settlement amount be assessable under the capital gains tax (CGT) provisions?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You were in receipt of payments that were administered by a government agency. This government agency stopped your payments in a relevant year.

You took legal action to re-establish your entitlement to the payments. The judgement that you received ruled that you were entitled to payments from a date later than when they were stopped. A decision was not made for the initial period for reasons relevant to your case, leaving you without payments for that period.

The government agency have admitted it was their negligence that created the circumstances where you were left without payments that you would otherwise by entitled to.

You had incurred legal expenses. The government agency has offered you a settlement for their defective administration and consequential compensatable losses incurred by you.

In accepting the payment you are acknowledging that it is a full and final settlement of your claim.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

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

Reasons for decision

Income

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income).

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

· have an element of periodicity, recurrence or regularity.

The lump sum payment you accepted is not income from rendering personal services, income from property or income from carrying on a business.

The payment was a one off payment and thus it does not have an element of recurrence or regularity.

The nature of the payment described in the scheme generally bears the character of that which it is designed to replace. If the lump sum payment is paid for the loss of a capital asset or amount then it will be regarded as a capital receipt and not ordinary income.

It is not a lump sum payment which substitutes for an income stream but rather for entering into a Deed of Release with the government agency for the purpose of compensating you for the loss you incurred due to their negligence.

The lump sum payment is a capital receipt and is not ordinary income. Therefore the amount is not assessable under section 6-5 of the ITAA 1997.

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but may be assessable under another provision called statutory income.

Capital gains tax (CGT)

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 as assessable income by another provision.

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.

As the amount received by you is a final settlement and is not in respect of an underlying asset, the whole of the settlement amount is treated as capital proceeds from a capital gains tax (CGT) event.

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.

Accordingly no portion of the lump sum compensation payment that you received is assessable as a capital gain under section 102-5 of the ITAA 1997.