Edited version of private advice

Authorisation Number: 1052000029794

Date of advice: 1 July 2022

Ruling

Subject: Compensation

Question 1

Is the amount received assessable as ordinary income?

Answer

No.

Question 2

Is the amount received assessable as statutory income?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You submitted your application to undertake a course of study at university

You accepted an offer to undertake a course of study at university.

You enrolled to study at university.

You made a complaint to the university, alleging that you had been sexually harassed by a university staff member.

You alleged that the staff member's conduct caused you to suffer hurt and distress and delayed you from both commencing and completing your university course.

Without any admission of liability, you and the university entered into a Deed of Settlement and Release to settle the claim, and all actions, proceedings, claims, suits and demands arising out of, or connected with the alleged conduct.

You were paid a sum of money inclusive of all legal costs and disbursements.

Upon accepting the sum, you agreed that it was paid in full and final satisfaction of all loss, damages and costs you suffered or incurred as a result of the alleged conduct.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 6-20

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1997 section 104-25

Reasons for decision

Question 1

Summary

The compensation amount you received is not assessable as ordinary income.

Detailed reasoning

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 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, namely, income from rendering personal services, income from property and income from carrying on a business.

Ordinary income generally includes receipts that are earned, expected, 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. Compensation payments which substitute income have been held by the courts to be income under ordinary concepts

On the other hand, 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.

Application to your circumstances

In your situation you have accepted a settlement payment as a result of a claim you made against the university staff member. The payment is not earned by you as it does not relate to services performed or to study of your university course.

The payment is also a one-off payment and thus it does not have an element of recurrence or regularity.

Considering the full circumstances, the payment amount is not regarded as ordinary income and is therefore not assessable as ordinary income.

Question 2

Summary

The compensation amount you received is not assessable as statutory income.

Detailed reasoning

Statutory income

Subsection 6-10(4) 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

Although an amount is statutory income because it has been included in assessable income under a provision of the ITAA 1997, it may be made exempt income or non-assessable non-exempt income under another provision.

The provisions dealing with statutory income are listed in section 10-5 of the ITAA 1997. Included in this list is capital gains

Capital Gains Tax (CGT) event C2 happens if your ownership of an intangible *CGT asset ends by the asset:

(a) being redeemed or cancelled; or

(b) being released, discharged or satisfied;

Receipt of a lump sum payment for the ending of an intangible CGT asset may give rise to a capital gain (statutory income). However, paragraph 118-37(1)(a) of the ITAA 1997 disregards a capital gain where the amount relates to compensationor damages received for any 'wrong, injury or illness you or your relative suffer personally'

Application to your circumstances

In this instance, the CGT event that happened was CGT event C2. This event occurred when your right to seek compensation ended. The time of the event was when you signed the deed resulting in your compensation payment being received.

As the amount you received was greater than the cost to acquire the asset (which was nil), you have made a capital gain. However, you can disregard the capital gain made as the amount you received relates to compensation for a wrong, injury or illness you suffered personally.

In your case, paragraph 118-37(1)(a) of the ITAA 1997 applies. This means that the lump sum payments you received are not included in your assessable income under the CGT provisions.

Conclusion

As the lump sum amount is not ordinary or statutory income, it is not assessable income. Therefore, the lump sum amount you received is not required to be included in your income tax return.