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Edited version of your written advice
Authorisation Number: 1051367430852
Date of advice: 30 April 2018
Ruling
Subject: Compensation payments
Question 1
Is the compensatory amount received “for a loss” assessable?
Answer
Yes
Question 2
Is the compensatory amount received “for the inconvenience and frustration” assessable?
Answer
No.
Question 3
Is the compensatory amount received “for the delay in response” assessable?
Answer
No.
Question 4
Is the compensatory amount received to “allow for financial loss” assessable?
Answer
Yes
Question 5
Is the compensatory amount received for a “refund of interest” assessable?
Answer
Yes
This ruling applies for the following period:
Year ended 30 June 2017
The scheme commences on:
1 July 2016
Relevant facts and circumstances
You received funds from an entity, however the entity made errors when paying the funds.
You submitted a complaint which received a delated response.
You were paid several compensatory amounts due to the errors made and due to the complaint.
You received amounts for:
● the inconvenience and frustration caused.
● the delay in responding to your complaint.
● financial loss
● a refund in interest.
Relevant legislative provisions
Division 6 of the Income Tax Assessment Act 1997 (ITAA 1997)
Section 118-37 of the ITAA 1997
Division 775 of the ITAA 1997
Reasons for decision
Detailed Reasoning
Compensation Payments
You received a payout of your pensions. These payouts were made incorrectly and you lodged a complaint. You have received a number of compensatory payments. You received payments for the following:
● the inconvenience and frustration caused in relation to your complaint.
● the delay in responding to your complaint.
● a refund in interest.
● financial loss.
Taxation Ruling TR 95/35 – Income tax: capital gain: treatment of compensation receipts (TR 95/35) provides the Commissioner’s view on the taxation of compensation payments. The taxation treatment of an amount of compensation depends on several factors, such as the reason for the payment and the components of the payment.
There are several forms of compensation relevant to your circumstances which are addressed in TR 95/35. TR 95/35 provides that there are taxation consequences when a taxpayer receives an un-dissected lump sum payment. You have been provided dissected amounts and as such these consequences do not need to be considered, each component of compensation is considered independently.
Paragraph 19 of TR 95/35 provides the following:
Compensation received by an individual for any wrong or injury suffered to his or her person or in his or her profession or vocation is exempt from CGT under subsection 160ZB(1).
Subsection 160ZB(1) of the Income Tax Assessment Act 1936 was repealed and replaced by section 118-37 of the ITAA 1997.
Section 118-37 of the ITAA 1997 states that you can disregard a capital gain or capital loss if you receive compensation and that compensation relates to either:
a) any wrong or injury you suffer in your occupation; or
b) any wrong, injury or illness you or your relative suffers personally.
The amounts you received as described in Points 1 and 2 were received for a wrong in which you suffered, that wrong being the inconvenience and frustration caused by the response to your complaint as well as the delay in response.
These meet the requirements of section 118-37 of the ITAA 1997 and the amounts you received for these reasons are not assessable.
Paragraph 26 of TR 95/35 provides the following in relation to the reception of interest as part of a compensation amount:
Interest awarded as part of a compensation amount is assessable income of the taxpayer under the general income provisions…
Therefore the amount of interest you received is assessable income.
The nature of the compensation payment will match the nature of the income or asset it is replacing as per the judgement in Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540. The view that compensation payments for the substitution for income are income has been upheld in several cases such as the decision in FC of T v. Inkster (1989) 24 FCR 53.
Similarly to the interest, the amounts received in relation to financial loss, are assessable income.