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Edited version of your written advice
Authorisation Number: 1012695488032
Ruling
Subject: Assessability of lump sum compensation payment
Question and answer
Is the lump sum compensation payment you received assessable income?
No.
This ruling applies for the following periods:
Year ending 30 June 2014
The scheme commenced on:
1 July 2013
Relevant facts and circumstances
In the 2014 income year, you and your spouse received a lump sum payment in settlement of your claim with Entity X.
You made a claim against Entity X alleging that you received incorrect advice regarding your eligibility to join your superannuation scheme.
You believe if you had you received the correct advice you would have applied to join and be admitted to the superannuation scheme and consequently would have received greater superannuation benefits upon retirement than those you actually received.
Under the terms of the deed of release, upon payment of the settlement sum, you release and discharge Entity X from the claim and all matters from and incidental to it.
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 82-130.
Income Tax Assessment Act 1997 Section 118-305.
Reasons for decision
Ordinary income
Section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes ordinary and statutory income derived directly and 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
• have an element of periodicity, recurrence or regularity.
In your case, you received a lump sum settlement amount in relation to your claim made against Entity X alleging that you received incorrect advice regarding your eligibility to join a superannuation scheme.
This amount is not income from rendering personal services, income from property or income from carrying on a business. It is also not earned, expected or relied upon and is a one-off payment and thus does not have an element of recurrence or regularity.
The lump sum payment is therefore not considered to be ordinary income, but rather, capital in nature.
Capital gains tax
A CGT event occurs when you receive the lump sum payment and release and discharge the Commonwealth from the claim.
Section 118-305 of the ITAA 1997 provides for a capital gain to be disregarded if it is made in relation to certain rights associated with superannuation. Specifically, a capital gain may be disregarded if it relates to a right to an amount payable out of a superannuation fund.
As the lump sum payment relates wholly to your interest in a superannuation fund, any capital gain or loss that arises will be disregarded.
Conclusion
As the lump sum payment is not ordinary income, an employment termination payment, or assessable as a capital gain or loss, the amount does not need to be included in your income tax returns.