Edited version of your written advice

Authorisation Number: 1051459140485

Date of advice: 26 November 2018

Ruling

Subject: Compensation payment

Question

Is the compensation payment included in your assessable income?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts

You attended a job interview and were offered employment on the spot.

After reading through your health declaration, the interviewer withdrew the offer and said he could no longer offer you a position because of certain health issues that were declared on the form.

You sought legal assistance and utilised appropriate services offered by the Anti-Discrimination Board. Through a conciliation process, you were able to resolve the matter with the organisation and avoided having to attend court.

The organisation acknowledged their wrong doing and agreed to settle the matter.

Your lawyer put forward a proposal which the organisation agreed to honour.

You were awarded an ex-gratia compensation payment.

The payment received was for humiliation, pain and suffering.

You were never an employee of the organisation.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10.

Income Tax Assessment Act 1997 Section 6-15.

Income Tax Assessment Act 1997 Sub paragraph 118-37(1)(a)(ii)

Detailed reasoning

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 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).

In your case, no amount you received was to compensate you for loss of income.

The payment you received is not earned by you as it does not relate to services performed. Rather the lump sum relates to your pain and suffering and humiliation. Although the payment can be said to be expected, and perhaps relied upon, this expectation arises from your pain and suffering, rather than from a relationship with personal services performed.

Therefore the payment is not assessable income under subsection 6-5(2) of the ITAA 1997.

Section 6-10 of the ITAA 1997 provides that your assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision.

Amounts received in respect of pain and suffering are generally capital in nature and are potentially taxable as statutory income under the capital gains tax (CGT) provisions of the ITAA 1997.

However, subparagraph 118-37(1)(a)(ii) of the ITAA 1997 disregards any capital gain or capital loss made relating to compensation or damages you receive for any wrong, injury or illness you suffer personally.

In your case, subparagraph 118-37(1)(a)(ii) of the ITAA 1997 applies. This means that the compensation you received is not included in your assessable income under the CGT provisions.

The compensation payment you received is not assessable as either ordinary income or statutory income, and is therefore not included in your assessable income. Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary or statutory income it is not assessable income. Consequently no part of the amount you received is included in your assessable income.

Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts and IT 2424 Income tax: compensation payments in respect of unlawful acts of discrimination confirms that your payment is not assessable income.