Edited version of private advice

Authorisation Number: 1052132710815

Date of advice: 28 June 2023

Ruling

Subject: Compensation

Question 1

Is the Government Interim Payment from the Support Scheme assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is the Parity Payment from the Support Scheme assessable as ordinary income under section 6-5 of the ITAA 1997?

Answer

No.

Question 3

Is the Energy Payment from the Support Scheme assessable as ordinary income under section 6-5 of the ITAA 1997?

Answer

No.

Question 4

Is the capital gain or loss from above three payments from the Support Scheme disregarded under the capital gains tax (CGT) provisions?

Answer

Yes.

Question 5

Will the ongoing monthly payments from the Support Scheme be assessable as ordinary income under section 6-5 of the ITAA 1997?

Answer

Yes.

Question 6

Is the backdated payment from the Support Scheme assessable as ordinary income under section 6-5 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

You are an Australian resident.

You formerly resided in foreign country.

You received medical treatment from a country A hospital. This treatment received has caused you serious health issues in the years since the medical treatment was received.

As a result, the foreign country A government is now giving redress compensation payments to victims of these medical treatments received via the Support Scheme. These payments are treated entirely as tax free in foreign Country A, for Country A recipient taxpayers.

You have had a scheme application approved by the foreign Country A government.

You will receive a one-off payment of £pound;XXX,XXX and then £pound;X,XXX per month for the rest of your life. This £pound;XXX,XXX payment will also include a backdated payment of £pound;XX,XXX.XX representing the £pound;X,XXX per month payments from the X XX 20XX until when you applied.

The payments under the support scheme are being made because:

• the chronic condition is expected to cause you to have resulting substantial and long-term difficulties when carrying out routine daily activities; and
• individuals living with those conditions face extra costs.

Your application did not (and was not required to, nor requested) disclose any information in respect of your income capacity.

Your payments have been scheduled as follows: 

•         you will receive a backdated payment of £pound;XX,XXX.XX, which is the total amount you would have received to date had you registered when the scheme began administering support payments. 

•         you will also receive a £pound;XX,XXX parity payment. This payment is due to you following the government announcement regarding changes to lump sum rates on XX X 20XX. 

•         your regular condition Stage 1 Payments will be made in monthly instalments on or before the XXth of each month. You will receive monthly payments of £pound;X,XXX.XX. 

•         you will also receive the 20XX/XX winter fuel payment of £pound;XXX, and also annually which is paid separately usually in XX.

•         on XX X 20XX, the foreign country A government announced interim payments of £pound;XXX,XXX for medical treatment beneficiaries and bereaved partner beneficiaries currently registered with the support schemes. You will receive this payment on X XX 20XX.

The payment schedule below outlines the payment you will receive:

•         Stage 1 Parity Lump sum - XX X 20XX - One off-£pound;XX,000.

•         Backdated stage 1 - XX X 20XX - One -off-£pound;XX,XXX.XX.

•         200XX/XX winter fuel - XX X 20XX - One off-£pound;XXX.

•         Regular stage 1 - XX X 20XX - One off - £pound;X,XXX.XX.

•         Government Interim Payment - X X 20XX One off- £pound;XXX,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 6-5(2)

Income Tax Assessment Act 1997 subsection 6-10(4)

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 108-5

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

International Tax Agreements Act 1953.

Reasons for decision

Ordinary Income

Subsection 6-5(2) of the 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 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 Scott v. FC of T (1966) 14 ATD 286, Windeyer J expressed the view that whether or not a particular receipt is income depends upon its quality in the hands of the recipient.

Question 1 and 2

The Parity Payment and the Government Interim Payment

The Parity Payment and the Government Interim Payment were not earned by you as it did not relate to services performed. The payments were not a revenue receipt directly related to your employment duties. The payments were not considered to be a payment for lost income. The payments were also one-off payments and thus do not have an element of recurrence or regularity. Although the payments can be said to be expected, and perhaps relied upon, this expectation arises from the chronic medical condition you suffer as a result of a medical procedure.

Considering the full circumstances, the Parity Payment and the Government Interim Payment will not be as ordinary income and are therefore not assessable under subsection 6-5(2) of the ITAA 1997.

Question 3

The 2022/23 Energy Payment

The 2022/23 Energy Payment is part of the overall compensation package paid under the Support Scheme and the payment is therefore not assessable under subsection 6-5(2) of the ITAA 1997.

Question 4

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.

The provisions dealing with statutory income are listed in section 10-5 of the ITAA 1997. Included in this list is capital gains (section 102-5 of the ITAA 1997).

Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a CGT event happens.

Section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property, or a legal or equitable right that is not property.

Taxation ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts discusses the CGT implications for compensation receipts.

Why the payment was made is an important factor in determining whether an asset has been disposed of for CGT purposes.

TR 95/35 discusses the various scenarios, including:

• disposal of the underlying asset,
• compensation for permanent damage to, or permanent reduction in value of, the underlying asset, and
• disposal of the right to seek compensation.

The relevant CGT asset in your case is your right to a capital amount payable under the Support Scheme due to the chronic medical condition you suffer as a result of a medical procedure.

However, paragraph 118-37(1)(b) of the ITAA 1997 disregards any capital gain or capital loss made where the amount relates to compensation or damages you receive for any wrong, injury or illness you suffer personally.

In your case, paragraph 118-37(1)(b) of the ITAA 1997 applies. This means that the Parity Payment, Government Interim Payment as well as the Energy Payment you received are not included in your assessable income under the CGT provisions.

Question 5 and 6

Regular Payments and Backdated Payment

The payments under the Support Scheme are being made to you because: of a medical condition is expected to cause you to have resulting substantial and long-term difficulties when carrying out routine daily activities; and individuals living with those conditions face extra costs.

Your application did not (and was not required to, nor requested) disclose any information in respect of your income capacity.

There is nothing in the documentation related to the Support Scheme which suggests that these payments are being made to you to compensate you for any loss of income, rather it stipulates that the purpose of the Support Scheme payments is to provide financial compensation for the treatment you received from the UK National Health Service and the associated substantial and long-term difficulties when carrying out routine daily activities. Further, the Support Scheme recognises that individuals living with Hepatitis C face extra costs.

The FC of T v The Myer Emporium Ltd 87 ATC 4363, the Full High Court (in a joint judgment) said (at p 4370):

" The periodicity, regularity and recurrence of a receipt has been considered to be a hallmark of its character as income in accordance with the ordinary concepts and usages of mankind. "

The Backdated Payments is a lump sum payment was given in recognition of the Regular Payments should have commenced as early as XX 20XX. While the Backdated Payment is a lump sum, it is distinguished from the previously mentioned payments in that it is provided in the expectation to meet existing and ongoing costs associated with the medical condition. It is this, expectation and the periodicity, regularity and recurrence of a receipt that gives it the character as income in accordance with the ordinary concepts.

It is clear that these payments were given to meet the regular extra expenses; while the payments are not to replace income, they are however intended to cover the extra ongoing expenses you will incur. This points to the payments being regular and relied upon to meet expenses and hence in the nature of income not capital.

Therefore, the Regular Payments and the Backdated Payment are assessable as ordinary income under subsection 6-5(2) of the ITAA 1997.

Double tax agreement between Australia and Country A

In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements.

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the ITAA 1936 and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The Country A Agreement is listed in section 5 of the Agreements Act.

The Country A agreement is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. The Country A agreement operates to avoid the double taxation of income received by residents of Australia and the UK.

Article 20 (Other income) of the Country A agreement sets out rules for incomes not dealt with in the other Articles of the agreement.

Article 20(1) of the Country A agreement states that:

•         Items of income beneficially owned by a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that State.

Article 20(3) of the Country A agreement states that:

•         Notwithstanding the provisions of paragraphs 1 and 2 of this Article, items of income of a resident of a Contracting State not dealt with in the foregoing Articles of this Convention from sources in the other Contracting State may also be taxed in the other Contracting State.

In your case, both Australia and Country A have taxing rights for the payments from the Support Scheme, however, all payments received under the Support Scheme are not subject to taxation in Country A (for residents or non-residents of Country A). As a resident of Australia for taxation purposes, you are required to include the assessable amount from the Support Scheme in your tax return.

Lump sum payments in arrears tax offsets

Lump sum payments in arrears (LSPIA) are taxable in the year you receive payment. You may be eligible for a tax offset to reduce your tax payable.

A lump sum payment in arrears amount, is a payment that relates to earlier income years.

You may be eligible for a tax offset on a LSPIA amount in certain conditions. Eligible payments usually relate to employment, compensation or welfare payments.

For more information, please go to ATO website and search QC 63791.