Edited version of private advice

Authorisation Number: 1051790629216

Date of advice: 15 December 2020

Ruling

Subject: Assessable income

Question

Is the mediation settlement of $XXX for relocation expenses assessable income?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You relocated from State 1 to State 2 in early 20XX to take up a position with a government department.

You were terminated as an employee in early 20YY and received a payment of outstanding benefits.

You disputed the termination with the Industrial Relations Commission and lost your case. You appealed the loss, but again lost the case.

You relocated to State 1 in early 20ZZ and claimed your relocation expenses. This claim was approved. However, this relocation payment was subsequently denied.

You therefore lodged a claim with the Industrial Relations Commission for relocation expenses. A mediation session was held in late 20ZZ where you agreed to accept a sum of $ZZZ as full settlement of your relocation claim. You gave up your right to seek compensation and this right is an intangible CGT asset.

The settlement offer was to pay you $XXX (gross) by electronic funds transfer within XX days of the offer being accepted if you agreed to discontinue your claim within X business days of receiving payment. You also agreed to not bring any further or future claims against the respondent in respect of matters arising out of the employment relationship.

In late 20ZZ you were paid the amount.

You contacted the employer and asked for the payment to be corrected. You argued that the payment was salary, however the employer did not agree and were not open to discussion on this matter. The employer did not include superannuation in this payment.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 118-37

Reasons for decision

Ordinary income

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) refers to ordinary income as income 'according to ordinary concepts'. This phrase is not defined under the legislation, but a large body of case law has developed to identify the factors that indicate if an amount is income according to ordinary concepts.

Typical examples of ordinary income include salaries, wages, and proceeds of carrying on a business, rent, interest and dividends. Typical examples of items which are not generally ordinary income include lottery prizes, proceeds from a hobby, loans and gifts.

A lump sum payment can be classed as ordinary income if it has been paid in compensation or settlement for lost salary or wages.

The Commissioner's view on the taxation treatment of a lump sum settlement payment is clarified in Taxation Determination: TD 93/58 Income tax: under what circumstances is the receipt of a lump sum compensation/settlement payment assessable? (TR93/58).

TD 93/58 states that if a payment is compensation for loss of income only, including interest, then it is assessable income.

This payment was not ordinary income because it is not income under ordinary concepts that is, it was not expected or earned, not related to an income producing activity and was in relation to recovery of a private expense.

Statutory income

Payments that are capital in nature may be assessable as statutory income under the capital gains tax (CGT) provisions. Your assessable income includes any net capital gains for an income year.

In Taxation Ruling TR 95/35: Income tax: capital gains: treatment of compensation receipts (TR 95/35), the Commissioner states that whether a lump sum or other compensation payment is assessable in the hands of the recipient depends on whether it is a receipt of a capital or income nature. This in turn depends upon consideration of all the circumstances surrounding the payment. It is the character of the receipt in the hands of the recipient that must be determined.

A CGT event C2 happens if a taxpayer's ownership of an intangibleCGT asset ends because the asset expires or is redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered or forfeited. A settlement or compensation payment may be paid as a result of giving up your right to seek compensation and this right is an intangibleCGT asset.

However, in TR 95/35 the Commissioner adopts a 'look-through' or 'underlying asset' approach to determine the asset that has been disposed of. The 'look-through' approach is the process of identifying the most relevant asset. It requires an analysis of all of the possible assets of the taxpayer in order to determine the asset to which the compensation amount is most directly related.

Application to your circumstances

The issue to be determined is the character of the lump sum payment in your hands.

•         Your original fulltime employment commenced in early 20XX.

•         Your employment was terminated in early 20YY, and all benefits were paid.

•         You relocated to State1.

•         You lodged a claim for relocation expenses which was eventually denied.

•         You lodged a claim in the Industrial Relations Commission for a relocation payment. This claim was mediated.

•         You accepted an offer of $XXX as full settlement of your claim.

•         The payment was made.

Having limited documentation which identifies the nature of the payment, the 'look-through' approach leads us to the conclusion that the payment you received was to compensate you for disposing of the right to seek relocation expenses.

In effect, you gave up your right to seek compensation for your relocation, and this right is an intangibleCGT asset. Therefore, you experienced a Capital Gains Tax (CGT) C2 event i.e. the disposal of the right to seek compensation. The capital proceeds would be the capital payment that you received.

The payment is not assessable as ordinary income as it is not a product of any employment, services or business carried on by you and it does not have the characteristics normally associated with ordinary income, rather, we consider this payment to be a result of your claim for relocation expenses.

The lump sum payment of $XXX was paid to you to dispose of your right to seek compensation. In return for this payment you discontinued your action against your former employer. Such a payment is assessable as capital. It is therefore not assessable as income but will be assessable as a capital gain.

The capital gain or capital loss will be the difference between the incidental costs (such as legal expenses incurred in the claim) and the compensation received.

There would not be any available discount as the right to seek compensation was not held for a period of 12 months.