Edited version of your written advice

Authorisation Number: 1051436735553

Date of advice: 12 October 2018

Ruling

Subject: Compensation

Question

Is the lump sum payment you received assessable as a capital gain?

Answer

Yes

Question

Is any capital gain arising from the general damages payment disregarded under paragraph 118-37 of the Income Tax Assessment Act 1997?

Answer

No

This ruling applies for the following period:

Year ending 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

You are diagnosed with a medical condition.

Mid 201xx you commenced working as a temporary enforcement officer with the ‘employer’.

Early the next year you advised your work team leader of your medical condition..

Mid that year you had an episode and were seen by a doctor who stated that you were fit and ready for work. The same day you returned to work and your ‘employer’ insisted you be seen by an ambulance. You were discharged immediately from hospital that same day.

Mid that year you were informed by the ‘employer’ to undertake a fitness for work assessment so you can return to work. You agreed to be seen as you were eager to return to work as soon as possible.

Mid that year you had a meeting with the recruitment manager who advised that the assessment showed you are fit to return to work. The recruitment manager continued to inform you that the ‘employer’s’ HR Manager advised you could not return to work as they believed you needed to be on a plan to manage your illness before you returned to work. They also advised your condition had affected your ability to come to work on a number of occasions and they had asked for your work pass so it can be cancelled.

Mid that year you received written confirmation from the recruitment manager of the ‘employer’ advising that your temporary contract has ceased as they required you to continue a program for fit for work. However you were deemed fit for work by a medical professional on mid-2017.

Your employment contract was intended to be until late that year.

You lodged a discrimination complaint against the ‘employer’ with the relevant authority.

Mid that year a conciliation agreement was reached to resolve the complaint. Without any admission of liability by any party, the ‘employer’ specifically agreed to pay you a net amount to be classified as general damages.

The amount was paid directly into your bank account.

You have not been provided with an Employment Termination Payment for this sum.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 paragraph 118-37

Reasons for decision

Summary

The lump sum amount for the general damages is a capital receipt.

The underlying asset is your right to seek compensation for an unfair dismissal.

The capital gain made from the CGT event happening is not disregarded under paragraph 118-37(1)(a) of the ITAA 1997 as your medical condition was not caused by any wrong or injury you suffered while working for the said employer.

Detailed reasoning

Section 6-5 of the Income Tax Assessment Act 1997 provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income).

Ordinary income has generally been held to include three categories; 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

● have an element of periodicity, recurrence or regularity.

In your case, the payment was in lieu of a claim for dismissal by discrimination. The amount paid is not income from rendering personal services, income from property or income from carrying on a business.

The payment was not earned by you as it does not relate to services performed. The payment is 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 pain and suffering resulting from the alleged discrimination, victimisation and inappropriate conduct, rather than from a relationship to personal services performed.

A compensation amount generally bears the character of that which it is designed to replace. If the compensation is paid for the loss of a capital asset or amount then it will be regarded as a capital receipt and not ordinary income.

Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts discusses compensation payments in respect of unlawful acts of discrimination, specifically under The Sex Discrimination Act (Commonwealth) 1984. At paragraph 8 it states:

…a payment to compensate for personal injury, injury to feelings, humiliation, embarrassment, depression, anxiety, etc. is not liable for income tax. It is a payment of a capital nature. Nor is the payment liable to tax under the capital gains tax provisions by reason of the exemption provided in subsection 160ZB(1) [section 118-37 ITAA 1997] for compensation or damages paid for wrong or injury suffered by a taxpayer to his or person or in his or her profession or vocation.

The general damages component of your settlement is not a lump sum payment which substitutes for an income stream or a reimbursement of medical expenses. Accordingly, the lump sum amount for the general damages is a capital receipt and is not ordinary income. Accordingly, the lump sum payment for general damages is not ordinary income and is therefore, not assessable under section 6-5 of the ITAA 1997.

Capital Gain

CGT Exemption

Taxation Ruling TR 95/35 deals with the capital gains treatment of compensation receipts. The ruling advocates a 'look-through' approach, which identifies the most relevant asset to which the compensation amount is related. If an amount is not received in respect of an underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation.

A capital gain may be disregarded if a compensation amount was paid in relation to either:

● a wrong or injury suffered in occupation, or

● any wrong, injury or illness you or your relative suffers personally

In your case, the underlying asset is your right to seek compensation for an unfair dismissal more so than giving up the right to seek compensation.

Application to your circumstances

You have received a lump sum compensation payment as a result of a conciliation agreement that arose from a complaint with the Commission. The compensation payment was made because of your loss of employment, due to alleged impairment discrimination.

The payment does not have the character of income under section 6-1 of the ITAA 1997 and the receipt will be considered a capital gain event. The amount of compensation you received was for general damages and was not apportioned to different heads of damage. You have not claimed that the compensation related to separate sources of damage and we have considered the lump sum as a single payment.

We acknowledge that you were diagnosed with a medical condition but the compensation was not paid specifically for your condition, but rather the loss of employment. The right to seek compensation for an unfair dismissal is not a personal wrong, injury or illness and therefor does not fall under the exemption for CGT under section 118-37. The amount will be assessed as a CGT event.