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Edited version of your written advice
Authorisation Number: 1012937036543
Date of advice: 14 January 2016
Ruling
Subject: Assessable Income - Settlement payment
Question 1
Is a lump sum paid to you to as a result of a settlement for Court proceedings for unpaid entitlements assessable income?
Answer
Yes
This ruling applies for the following periods:
Year ended 30 June 20YY
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You initiated legal proceedings against your former employer in respect of unpaid entitlements during the period of your employment.
A Deed of Settlement and Release was entered between you and your former employer.
Your former employer agreed to pay you a sum and you agreed to accept the settlement sum in full and final satisfaction of any claim you had against your former employer.
You received a payment as a settlement in relation to this action.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Reasons for decision
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or 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; and
• Have an element of periodicity, recurrence or regularity.
Payments of salary and wages are income according to ordinary concepts and are included in assessable income under section 6-5 of the ITAA 1997.
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 under ordinary concepts (FC of T v. Inkster (1989) 20 ATR 1516; 89 ATC 5142; Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641; 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.
In your case, the settlement payment is compensation for loss of income from unpaid entitlements which we consider to be ordinary income and is included in assessable income under section 6-5 of the ITAA 1997.