Edited version of your written advice

Authorisation Number: 1012921511828

Date of advice: 3 December 2015

Ruling

Subject: Compensation

Question

Is the compensation payment for defective administration regarded as assessable income?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2016

The scheme commenced on

1 July 2015

Relevant facts

You lodged a claim for compensation under the scheme for Compensation for Detriment caused by Defective Administration (CDDA) with the entity A.

You claimed that entity A did not implement the provisions of the relevant agreement correctly. As a result you were unable to include the increased liability in your other financial matters and statements which would have reduced the amount you paid to another entity.

You have been offered compensation in relation to the above.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 6-5

Reasons for decision

Ordinary income

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes the ordinary income they derived directly or indirectly from all sources, whether in or out of Australia, 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.

For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; 10 ATD 82).

Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; (1989) 20 ATR 1516; 89 ATC 5142, Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641, and Case Y47 (1991) 22 ATR 3422; 91 ATC 433).

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.

You received your compensation payment as a result of the incorrect implementation of an agreement by entity A. This also meant that you overpaid entity B.

The financial loss you suffered does not relate to your assessable income.

The compensation payment is not earned by you as it does not relate to services performed or income from carrying on a business. The payment is also a one-off payment and thus it does not have an element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation arises from the defective administration, rather than from a relationship to personal services performed.

The payment for defective administration and the associated financial losses are not regarded as income in nature. It is considered that no component of the amount you received was received to compensate you for loss of income. Therefore, your compensation is not assessable under section 6-5 of the ITAA 1997.