Edited version of private advice

Authorisation Number: 1052221320349

Date of advice: 13 February 2024

Ruling

Subject: Assessable income - carer payments

Question

Are the payments from a compensatory trust to the parents of a permanently disabled person assessable income pursuant to section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

Year ended XX XXXX 20YY

Year ended XX XXXX 20YY

The scheme commenced on:

XX XXXX 20YY

Relevant facts and circumstances

Your child was seriously injured in an accident many years ago.

Your child requires 24-hour care due to the nature of the injuries suffered.

In XXXX 20YY, a determination was made concerning your child's level of disability and a final amount was transferred to a compensatory trust.

The sealed orders detailed that a payment to the amount of $XX per annum be paid to you as full-time carers for your child.

The amounts received are a measure of compensatory support which has not changed in many years.

You received an additional amount within the 20YY-YY income year of $XX from the trustee reflecting ad-hoc reimbursements of expenses for your child.

The trustee of the compensation trust expects that you will provide care and support services to your child.

There is no verbal or written agreement detailing tasks or instructions that qualify the entitlement to the receipt of the weekly payment except the expectation of care or support services.

All payments are made out of the capital of the compensatory trust and are not deductible to the trust.

You attend to your child's daily activities and reside with them full time.

You provide care and support to your child motivated by love and affection.

You and your child reside at a property owned by yourselves and at an alternate property owned by your child.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Reasons for decision

Section 6-5 of the 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.

Relevant factors in determining whether a payment is ordinary income include:

•                     whether the payment is the product of any employment, services rendered, or any business

•                     whether the payment is expected and relied upon

•                     the character of the payment in the hands of the recipient

•                     whether the payment is received as a lump sum or periodically; and

•                     the motive of the person making the payment, although this is rarely decisive by itself.

The payment to a taxpayer for services rendered is assessable income, even though the taxpayer does not provide those services as an employee or in carrying on a business (Brent v Commissioner of Taxation [1971] HCA 48).

The courts have held that a voluntary payment or gift is generally ordinary income in the hands of the recipient where the receipt is the product of services rendered by the recipient (Federal Commissioner of Taxation v Harris [1979] 37 FLR 325; 79 ATC 4383; 10 ATR 84).

For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted (Commissioner of Taxation (Cth) v Dixon [1952] HCA 65).

In Scott v Federal Commissioner of Taxation [1966] HCA 48, Windeyer J expressed the view that whether or not a particular receipt is income depends upon its quality in the hands of the recipient. Furthermore, in Tindal v Federal Commissioner of Taxation [1946] HCA 26, it was held that sums paid out of a capital amount may be treated as assessable income in the hands of the recipient.

In your circumstances

The amount paid into the compensatory trust reflects a capital amount for compensation. Payments out of this amount may amount to assessable income in the hands of the recipient.

The domestic support payment is received with the trustee's expectation that you will provide care and support services to your son, establishing the payment's purpose. These periodic, expected and relied-upon payments meet the criteria for ordinary income. Therefore, the domestic support payments you receive are considered to be ordinary income and are assessable under section 6-5 of the ITAA 1997.