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Edited version of your written advice
Authorisation Number: 1051435008324
Date of advice: 3 October 2018
Ruling
Subject: Income – assessable - compensation – loss of income
Question:
Will the compensation payment you received for loss of income be assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997?
Answer:
Yes.
This ruling applies for the following period
Income year ending 30 June 2018
The scheme commences on
1 July 2017.
Relevant facts and circumstances
You were a victim of crime and made a compensation claim.
You were awarded a lump sum compensation amount which included a payment for loss of income.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5
Income Tax Assessment Act 1997 section 118-37
Reasons for decision
Summary
The amount paid to compensate you for loss of income is assessable as ordinary income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997).
Detailed reasoning
Subsection 6-5(2) of the 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 been held to include income from providing 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 or relied upon
● have an element of periodicity, recurrence or regularity
● replace income.
An amount paid to compensate for loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; 10 ATD 82).
Taxation Determination TD 93/58 (TD 93/58) outlines the circumstances under which the receipt of a lump sum compensation or settlement payment is assessable as ordinary income. TD 93/58 states that where the compensation payment is for loss of income, the amount is assessable as ordinary income. Where a portion of a lump sum payment is identifiable and quantifiable as income, that portion of the payment will be assessable.
Application to your situation
In your case, you received a compensation payment. You have provided a copy of the compensation payment that specifies an amount was paid for loss of income.
It is viewed that in accordance with TD 93/58, the payment was paid to you to compensate you for loss of income and to replace income that you would have earned, expected, relied upon and would have had an element of periodicity, recurrence or regularity. It has been held in court that payments paid to replace past income are considered to be assessable.
Therefore, it is viewed that the loss of income payment is assessable as ordinary income under subsection 6-5(2) of the ITAA 1997 in the income year in which you receive it.