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Ruling
Subject: Assessable income of deceased estate
Question
Will the payment from the deceased's employer form part of the net income (or assessable income) of the estate?
Answer
No
This ruling applies for the following period:
Year ending 30 June 2013
The scheme commenced on:
1 July 2012
Relevant facts and circumstances
The deceased's living de-facto spouse made a claim to the deceased's employer for the payment of the deceased's accrued unpaid annual leave and long service leave. The deceased's employer made this payment to the de-facto spouse.
Due to the length of the relationship between the deceased and their de-facto spouse, the de-facto spouse should not have received the payment.
You applied to the deceased's employer for compensation in order to have the payment made rightfully to the executor of the estate.
The deceased's employer ruled on the matter and admitted that they had paid the accrued unpaid annual leave and long service leave to the wrong party.
The deceased's employer made a payment to the executor of the estate, and in their advice to you, labelled this payment as 'compensation, in the amount of X being equivalent to the sum of long service leave and recreation leave that had been accrued by the deceased at the time of their death'.
In their advice to you in respect of their decision in relation to your claim, the deceased's employer advised:
If there has been a financial detriment, the overarching principle used in determining the level of compensation, is to restore the applicant to the position he or she would have been in had the defective administration not occurred.
The last will and testament of the deceased bequeathed the property of the estate to their then children only.
Probate was granted.
The assets of the estate had been sold and paid out in accordance with the will prior to receiving the payment.
The only remaining administration of the estate required is the distribution of the payment made by the deceased's employer.
Relevant legislative provisions
Income Tax Assessment Act 1936 Subsection 101A(1)
Income Tax Assessment Act 1936 Subsection 101A(2)
Reasons for decision
For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; (1989) 20 ATR 1516; 89 ATC 5142, Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641, and Case Y47 (1991) 22 ATR 3422; 91 ATC 433).
On the other hand, if the compensation is paid for the loss of a capital asset or amount then it will be regarded as a capital receipt and not ordinary income.
In this case, you received a payment which was made to substitute the payment you should have received in relation to the deceased's accrued unpaid annual leave and long service leave. Although the payment has been labelled as 'compensation' by the deceased's employer, in essence, you have simply been paid an amount which you were entitled to. Accordingly, the payment will acquire the character of that for which it is substituted.
Subsection 101A(1) of the ITAA 1936, requires the trustee of a deceased estate to include in the assessable income of the trust estate any amounts that are received after the death of the deceased, where such amounts would have been assessable income in the hands of the deceased person if they had received the amounts during their lifetime. Such income is to be included in the assessable income of the trust estate in the income year in which the amounts are received, and the amounts are deemed to be income to which no beneficiary is presently entitled.
However, in accordance with subsection 101A(2) ITAA 1936, subsection 101A(1) of the ITAA 1936 does not apply to an amount received by the trustee of a deceased estate where that amount represents a lump sum payment for unused annual or long service leave that would have been included in the assessable to the deceased under section 83-10 or 83-80 of the ITAA 1997 if they had received it during their lifetime.
Had the payment been made to you correctly in the first instance, the payment would not be assessable income of the deceased estate in accordance with subsection 101A(2) ITAA 1936. Accordingly, the payment that was made to you to replace this amount will also not be assessable income of the deceased estate in accordance with subsection 101A(2) ITAA 1936.