Edited version of your private ruling

Authorisation Number: 1012515148159

Ruling

Subject: Compensation payments

Question 1

Does the compensation component of the payment you received form part of your assessable income?

Answer

No.

Question 2

Does the interest component of the payment you received form part of your assessable income?

Answer

Yes.

This ruling applies for the following period

Year ending 30 June 2014

The scheme commenced on

1 July 2012

Relevant facts and circumstances

You were living in a house on a property.

The property was compulsorily acquired.

You were required to move from the property.

You received compensation for your personal relocation costs, loss of your main residence and reimbursement of your legal and professional costs. The amounts were paid to you under provisions of Australian legislation.

You were also entitled to receive interest on the compensation calculated from the date of the acquisition until the day on which the compensation was paid.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-37

Reasons for decision

Summary

The compensation component of the payment you received does not form part of your assessable income.

Any interest component received is included in your assessable income.

Detailed reasoning

Compensation payments as ordinary income

Under subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997), an amount is assessable income if it is income according to ordinary concepts (ordinary income).

Relevant factors in determining whether an amount is ordinary income include:

· whether the payment is the product of any employment, services rendered, or any business

· the quality or character of the payment in the hands of the recipient

· the form of the receipt, that is, whether it is received as a lump sum or periodically, and

· the motive of the person making the payment. Motive, however, is rarely decisive as in many cases a mixture of motives may exist.

The compensation payment made to you as a result of the property being compulsorily acquired cannot be said to have been 'earned' as it was not paid as a direct reward for services performed. It was a payment made to compensate you for the inconvenience of moving and to reimburse legal expenses.

It is considered that the payment does not possess the characteristics of ordinary income. As such the payment is not income under ordinary concepts and therefore is not assessable income under section 6-5 of the ITAA 1997.

Compensation payment as a capital gain

A capital gain or loss is made if a capital gains tax (CGT) event happens. A capital gain occurs where a capital asset is disposed of for an amount greater than the cost base of the capital asset.

A right to seek compensation is an intangible CGT asset under section 108-5 of the ITAA 1997. CGT event C2 under section 104-25 of the ITAA 1997 happens when the ownership of an intangible CGT asset ends by the asset being satisfied or surrendered. In other words, the taxpayer receives the compensation payment.

You have received compensation paid for different reasons. Each compensation amount will be looked at separately to determine if it is a capital gain to be included in your assessable income.

Personal relocation costs

Subsection 118-37(1) of the ITAA 1997 disregards any capital gain you make as a result of compensation or damages you receive for any wrong or injury you suffer personally.

As you received this compensation for injury or damage suffered as a result of relocating to another residence due to the compulsory acquisition of the property, any capital gain is exempt from your assessable income.

Loss of dwelling

Section 118-110 of the ITAA 1997 disregards a capital gain made in relation to a dwelling you have a legal right to occupy where the dwelling was your principal place of residence.

You received a compensation payment for the loss of your main residence as a result of the compulsory acquisition of the property.

As such, section 118-110 of the ITAA 1997 exempts this compensation payment from your assessable income as it relates to the loss your principal place of residence.

Legal and professional costs

Subsection 118-37(2) of the ITAA 1997 disregards a capital gain you make as a result of receiving a payment as reimbursement of your expenses under Australian legislation.

You were reimbursed your legal expenses.

As the reimbursement was made under a provision contained within Australian legislation, the payment is not included in your assessable income.

Interest on compensation amounts

Interest income is normally regarded as ordinary income and therefore forms part of a taxpayer's assessable income.

You received interest on the compensation payment made to you. Whilst the compensation payment itself is not assessable, any interest income derived from the principal amount will be assessable.