Edited version of private advice

Authorisation Number: 1052163363740

Date of advice: 6 September 2023

Ruling

Subject: Lump sum - compensation

Question

Is the lump sum amount you received as a result of the class action assessable?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

XX XXXX 20XX

Relevant facts and circumstances

You are employed by Company A.

You participated in a class action; Person A & Ors v Company A (Class Action).

The Class Action sought to recover compensation for those employed by Company A over a period of several years, who claimed not to have been paid some wages or who had amounts deducted from their wages that should not have been withheld.

On XX XXXX 20XX you received a lump sum payment of $X in settlement of the Class Action.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

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

Income Tax Assessment Act 1997 Subsection 6-5(4)

Reasons for decision

Section 6-5 of Income Tax Assessment Act 1997 (ITAA 1997) states your assessable income includes ordinary income derived directly or indirectly from all sources during the income year.

A lump sum payment is generally classified as ordinary income if it is simply a lump sum made up of periodic income payments but paid in arrears to cover a certain period. The payment substitutes income and has been held by the courts to be income under ordinary concepts (Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; 89 ATC 5142, (1989) 20 ATR 1516). The payment retains the characteristics of ordinary income even though paid as a lump sum.

Taxation Determination TD 93/58 Income tax: under what circumstances is the receipt of a lump sum compensation/settlement payment assessable? states that where a compensation/settlement payment is for loss of income, the amount is assessable as ordinary income.

Income is assessable for income tax purposes, under subsection 6-5(4) of theITAA 1997, when the person is taken to have derived it. The term derived is explained in the subsection to mean that the amount is derived when it is received or applied or dealt with in any way at the person's direction.

This is further explained in Taxation Ruling TR 98/1 Income tax: determination of income; receipts versus earnings which states that employment income is assessable in the income year it is received for the purposes of section 6-5 of the ITAA 1997, even though the payment may relate to a past or future income period.

Application to your circumstances

In your case, the lump sum payment you received was for compensation for amounts of unpaid wages. It is considered to be ordinary income as it acquires the character of the income for which it was substituted.

This lump sum was received in XXXX 20XX.

Accordingly, the amount you received is ordinary income that is fully assessable in the income year it was received, being the 20XX-XX income year.