Edited version of your private ruling

Authorisation Number: 1012468287652

Ruling

Subject: Lump sum payment

Question 1

Does the lump sum payment in arrears for unpaid car and travel allowances form part of your assessable income in the relevant year?

Answer

Yes.

Question 2

Does the interest awarded by the court form part of your assessable income in the relevant year?

Answer

Yes.

Question 3

Does the penalty awarded by the court form part of your assessable income?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts and circumstances

In your employment you used your car for work related purposes.

Under your employer's Collective Bargaining Agreement (CBA), you were entitled to receive a car allowance for the use of your car.

You entered into legal proceedings against your employer to recover unpaid car allowances.

As a result, the court awarded you:

· an amount for unpaid motor vehicle and travel allowances relating to the relevant and subsequent financial years calculated on a cents per kilometre basis less previous payments made to you

· interest, and

· a penalty amount for your employer breaching the CBA.

These amounts were paid into your bank account during the 20XX financial year

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

Summary

The payment of previously unpaid motor vehicle and travel allowances and associated interest form part of your assessable income for the year ended 30 June 20XX as they are considered to be ordinary income. The payment you receive for your employer breaching the CBA is not assessable to you as it does not have the characteristics of income.

Detailed reasoning

Section 6-5 of the Income Tax Assessment Act 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

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, and

· have an element of periodicity, recurrence or regularity.

It is not necessary for a receipt to have all these characteristics to be considered income.

Taxation Determination TD 93/58 provides the ATO's view on when the receipt of a lump sum compensation payment is assessable income and specifies that such a receipt will be assessable:

· if the payment is for loss of income only and/or interest associated with that lost income, or

· if a portion of the lump sum is identifiable and quantifiable as income.

This view has been upheld by the courts in cases where compensation receipts for loss of income, and where interest has been awarded in relation to lost income, have been held to be income under ordinary concepts and therefore assessable.

Income is required to be declared in the financial year in which it is received or credited to a taxpayer's account. This principle applies even if the lump sum amount relates to earlier financial years.

In your case, you received a payment from your employer under a court order for unpaid allowances, interest and their breaching the CBA. Each of these payments will be considered separately.

Compensation for unpaid allowances

Allowances paid by employers are considered income according to ordinary concepts and are included in assessable income. A taxpayer who receives a motor vehicle allowance which is calculated using a cents per kilometre basis is required to include the allowance as assessable income. Depending on the circumstances, the taxpayer may be able to claim a deduction for work-related travel, however, they must meet any substantiation requirements of the method they choose to calculate their car expenses deduction.

During the 20XX financial year received a payment for unpaid motor vehicle and travel allowances relating to earlier financial years. The allowance was calculated on a cents per kilometre basis.

The car allowance would have formed part of your assessable income had you received it in the relevant financial years. Thus, the payment you received forms part of your assessable income for the year ended 30 June 20XX, the year in which it was received.

Interest on unpaid allowances

As part of the court order you were awarded interest in relation to the unpaid motor allowances. As per TD 93/58, this interest amount forms part of your assessable income for the year ended 30 June 20XX as it relates to assessable allowances.

Penalty for breach

The court awarded you a pecuniary penalty as your employer had breached the CBA.

You have not earned the penalty as the payment does not relate to services performed. Even though you requested the court to consider the penalty, it cannot be said to be expected or relied upon. The penalty was also a one-off payment and thus does not have an element of recurrence or regularity.

Therefore, the payment you received as a result of your employer breaching the CBA is not considered ordinary income and is not assessable.