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Edited version of private advice
Authorisation Number: 1012653405735
Ruling
Subject: Compensation payment
Question
Is the payment for loss of income assessable?
Answer
Yes.
This ruling applies for the following period:
Year ending 30 June 2014
The scheme commences on:
1 July 2013
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
During the relevant financial year you injured yourself due to a hole which had been caused and/or contributed to a burst water main and.
You sought compensation.
It was agreed that you would receive a payment for loss of earning.
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 6-15.
Income Tax Assessment Act 1997 Paragraph 118-37(1)(b).
Reasons for decision
Subsection 6-5(2) provides that the assessable income of an Australian resident includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
Based on case law, it can be said that ordinary income generally includes receipts that are earned, expected, relied upon, and have an element of periodicity, recurrence or regularity.
Payments of salary and wages are income according to ordinary concepts and are included in your assessable income.
An amount paid to compensate for loss generally acquires the character 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 according to ordinary concepts (FC of T v. Inkster 89 ATC 5142; (1989) 20 ATR 1516 and Tinkler v. FC of T 79 ATC 4641; (1979) 10 ATR 411).
In this case, you received a lump sum payment for loss of earning.
Taxation Determination TD 93/58 explains the circumstances in which a lump sum compensation/settlement payment is assessable, and states that such a payment is assessable income:
• if the payment is compensation for loss of income only (even when the basis of the calculation of the lump sum cannot be determined), or
• to the extent that a portion of the lump sum payment is identifiable and quantifiable as income. This will be possible where the parties either expressly or impliedly agree that a certain portion of the payment relates to a loss of an income nature.
The release agreement clearly states that you will be paid for loss of earning. Therefore the income is assessable.