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Edited version of your written advice
Authorisation Number: 1012921376030
Date of advice: 3 December 2015
Ruling
Subject: Repaid income
Question
Are you entitled to reduce your assessable income by the amount repaid for the 2014-15 financial year?
Answer
Yes.
This ruling applies for the following period:
Year ended 30 June 2015
The scheme commenced on:
1 July 2014
Relevant facts
You were an employee.
You applied for compensation.
You received compensation payments for a significant period in the 2014-15 financial year.
Your employer appealed your compensation entitlement. The decision was made in the 2015-16 financial year.
As a result you have to repay compensation payments for the 2014-15 financial year.
You have now retired from your employment.
Relevant legislative provisions
Income Tax Assessment Act 1997 - Section 6-5.
Income Tax Assessment Act 1997 - Section 59-30
Reasons for decision
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) states that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources whether in or out of Australia, during the income year.
Compensation payments received as compensation for loss of wages are fully assessable as ordinary income. The essential character and nature of such payments are that of an income substitute (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; 10 ATD 82).
Your compensation payments are regarded as ordinary income and therefore assessable under subsection 6-5(2) of the ITAA 1997.
You have now been requested to repay some of these benefits following an appeal lodged by your former employer.
Section 59-30 of the ITAA 1997 states that an amount you receive is not assessable and is not exempt income for an income year if:
(a) you must repay it; and
(b) you repay it in a later income year; and
(c) you cannot deduct the repayment for any income year.
However, subsection 59-30(3) of the ITAA 1997 states this section does not apply to an amount you must repay because you received a lump sum as compensation or damages for a wrong or injury suffered in your occupation.
In your case, you did not receive a lump sum compensation payment. Therefore subsection 59-30(3) of the ITAA 1997 is not relevant in your circumstances.
The repaid amount is not assessable and not exempt income under section 59-30 of the ITAA 1997.
The repayment will be made in the 2015-16 financial year. Therefore the relevant amount should be removed from your assessable income in the 2014-15 financial year.