Edited version of your private ruling

Authorisation Number: 1012459642032

Ruling

Subject: Compensation payment

Question 1

Will a settlement amount which is paid to you, as compensation, by an educational institution because the course of study you undertook did not provide you with accreditation be assessable as either ordinary or statutory income?

Answer

No.

Question 2

Will the compensation payments you received for time off work and the costs associated with undertaking further studies to gain your accreditation be assessable income as either ordinary or statutory income.

This ruling applies for the following period:

Year ending 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You completed a degree at an educational institution.

The course you undertook was not accredited and you were unable to obtain registration of your profession after you completed the course.

You had been offered a position in your profession but you could not take the position as you were not registered but had to accept a lower paid position.

Whilst working a lower paid position you were required to have unpaid time off to complete further studies and exams to become accredited.

The educational institution compensated you for expenses you incurred to undertake further study and paid you a compensation amount form the unpaid leave you were required to take.

Costs for flights, accommodation and exams were paid directly to the relevant parties by the educational institution.

You made a claim with the educational institution for compensation relating to the non- accreditation of the course you undertook as you had suffered losses arising from the delay in your registration of your profession.

The educational institution has agreed to make a settlement payment under a Deed of Settlement and Release.

The settlement is made in full and final settlement and satisfaction of all claims and is made ex gratia and without admission of liability on the educational institution.

You have provided a copy of the unsigned Deed of Settlement Release.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5,

Income Tax Assessment Act 1997 Section 6-10,

Income Tax Assessment Act 1997 Section 102-5

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.

In your case, you are to receive compensation, and will receive further compensation as a result of the fact the course you undertook did not provide you with appropriate accreditation.

An amount paid to compensate for loss generally acquires the characteristic of that for which it is substituted (FC of T v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 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.

Taxation Ruling IT 2193 deals with the issue of compensation of the loss of earning capacity. IT 2193 makes it clear that compensation for loss of earning capacity will not lose its character as a capital receipt simply because the amount of compensation is calculated by reference to the amount of income the taxpayer would have earned.

You will receive a compensation payment for the loss of a capital asset, that is, the capacity to earn income, the compensation payment will be deemed a capital receipt and not ordinary income. Therefore, the compensation payment will not be assessable under section 6-5 of the ITAA 1997.

Similarly, the payment you received while completing further studies and exams whilst taking time off your work will not be 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 amounts 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 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. It is considered that the non accreditation of the course was a wrong that you suffered personally.

Accordingly no portion of the compensation payments is assessable as a capital gain under section 102-5 of the ITAA 1997.

The compensation payments are not ordinary income and are not statutory income. Accordingly, you are not required to include any portion of the payments in your assessable income.