Edited version of private advice

Authorisation Number: 1052173400667

Date of advice: 29 September 2023

Ruling

Subject: Assessable income

Question 1

Are the periodic payments you receive from the Country Z Government, assessable income?

Answer

Yes.

Question 2

Is the lump sum payment you received from Country Z Government, assessable income?

Answer

No.

Question 3

Will the lump sum payment be included in your assessable income under the capital gains provisions?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Country Z Government has accepted your medical condition which was caused by your work when you previously lived in Country Z. They have awarded you compensation consisting of both a lump sum and a benefit paid periodically.

The periodic benefits are paid to assist you with any additional health care and help around the home that you require into the future.

The lump sum amount of compensation was based on your age and therefore your expected life expectancy, and on the severity of your condition as assessed at the time of the claim.

A person residing in Country Z receiving these compensation payments does not pay tax on them, and does not incur a reduction in their age pension on receiving them.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 6-5

Income Tax Assessment Act 1997 section 118-37

Reasons for decision

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 they derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

The courts have identified a number of factors which indicate whether an amount is regarded as ordinary income. Characteristics of ordinary 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) (Dixon's case). 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 Dixon's case it was found that even if the receipts are not directly attributable to employment or services rendered, the expected regular periodical payments had the character of ordinary income.

Pensions and other living allowances may not be in connection with employment, yet are generally regarded as ordinary assessable income.

In FC of T v. Blake (1984) 75 FLR 315, the characteristics of the payments in question were looked at to decide if they were assessable income. The periodical nature of the payment, the recipient's reliance or otherwise on the payment for regular expenditure on himself and his dependents, led to the decision that the payments were assessable income.

In FC of T v. The Myer Emporium Ltd 87 ATC 4363, the Full High Court 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.

In your case, you are receiving periodic compensation payments. The payments are expected, relied upon and received on a regular basis. Therefore, as per the court cases discussed above, the periodic compensation payments are ordinary income and assessable under subsection 6-5(2) of the ITAA 1997.

We note that you advised that a person residing in Country Z receiving these periodic compensation payments does not pay tax on them, and does not incur a reduction in their age pension on receiving them. However, how these payments are treated under Country Z law does not mean they are not ordinary income or not assessable under Australian law.

The lump sum payment made to you is not income from rendering personal services, income from property or income from carrying on a business.

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

Therefore, the lump sum payment will not be assessable as ordinary income.

The receipt of a lump sum compensation amount may give rise to a capital gain (statutory income) under capital gains tax (CGT) event C2 (section 104-25 of the ITAA 1997) which relates to cancellation, surrender or similar endings. However, a capital gain or loss made upon the ending of a CGT asset acquired on or after 20 September 1985 is disregarded under subparagraph 118-37(1)(a)(i) of the ITAA 1997, if the CGT event is in relation to compensation or damages received for any wrong or injury you suffer in your occupation.

Therefore, any capital gain or capital loss arising from the CGT event will be disregarded under subparagraph 118-37(1)(a)(i) of the ITAA 1997 and the lump sum payment will not be assessable as statutory income.

As the lump sum payment is not assessable as either ordinary or statutory income, you are not required to include this amount in your assessable income.