Edited version of private advice

Authorisation Number: 1052245640779

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Date of advice: 29 April 2024

Ruling

Subject: Assessable income

Question

Is the ex gratia payment you received considered to be assessable income?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

On XX XX 20XX, you commenced your employment with your employer (Employer).

On XX XX 20XX, you were issued a letter to vary the terms and conditions of your employment with your Employer.

The variation was due to the reclassification of your position.

The variation letter confirmed your rate of pay would change, effective XX XX 20XX.

You accepted the variation to the terms and conditions of your employment.

On or about XX 20XX, you made a claim that you had potentially been underpaid entitlements in relation to your employment.

Your claim relates to an underpayment of wages for the 20XX to 20XX (inclusive) financial years.

On XX XX 20XX, your Employer issued a letter to you, detailing the outcome of the investigation into your claim.

The letter states that the Board of your Employer considers that no underpayment occurred and determined that the payment was based on a misunderstanding of a wage payment obligation.

On XX XX 20XX, you and your employment signed a Deed of Acknowledgment.

The Deed of Acknowledgment states at Paragraph 3(a) that:

•         'The parties acknowledge and agree that the payment is to be classified as a voluntary ex gratia payment and/or bonus in full and final settlement of the Misunderstanding and Alleged Underpayment.'

The Deed of Acknowledgment also states at Paragraph 3(b) that:

•         'The parties acknowledge and agree that the payment does not form part of [your] wages or salary and is not to be taken into account when calculating statutory superannuation, portable long service leave, and/or any other entitlement made with reference to wages or salary.'

Rather than seek to have the payment refunded, the parties have treated the amount you received as an ex-gratia payment.

You and your Employer disagree about the elements of the calculations made and the decision reached on the calculations.

On or about XX XX 20XX, you received the ex gratia (bonus) payment.

The payment was processed as ordinary hours earnings.

The Gross amount of the payment was $XX,XXX.XX.

Your Employer withheld $X,XXX.XX of income tax.

Relevant legislative provisions

Tax Administration Act 1953 section 15-2

Tax Administration Act 1953 section 12-35

Tax Administration Act 1953 section 15-25

Tax Administration Act 1953 section 15-30

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 82-130

Reasons for decision

Question

Is the ex gratia payment you received considered to be assessable income?

Summary

Section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes ordinary and statutory income derived directly and indirectly from all sources during the income year.

Section 15-2 of the Tax Administration Act 1953 (TAA 1953) provides that assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you.

In your case, your claims against your employer were in relation to an underpayment of income. You did not make any claims of a non-income nature. Therefore, the ex gratia payment is included in your assessable income.

Detailed reasoning

Assessable income

Section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes ordinary and statutory income derived directly and indirectly from all sources during the income year.

Taxation Ruling 98/1 - Income tax: determination of income; receipts versus earnings considers the appropriate method of determining when income is derived under subsection 6-5(2) of the ITAA 1997 when income is earned on one tax year but received in another. Paragraph 42 is relevant to your circumstances and explains that income from employment is normally assessable on a receipts basis. Salary and wages or other employment remuneration are assessable on receipt, even though they relate to past of future income periods. Therefore, the lump sum you received is an assessable amount in the year in which it is received.

Taxation Ruling 93/58 - Income tax: under what circumstances is the receipt of a lump sum compensation/settlement payment assessable? Also supports that the lump sum compensation or settlement payment your received, is to be included in your assessable income if the payment relates to claims for loss of income only.

Section 15-2 of the Tax Administration Act 1953 (TAA 1953) provides that assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you.

In addition, section 12-35 of the TAA 1953 requires that an entity (in this case, your employer) must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee.

Taxation Ruling 2023/4 - Income tax: pay as you go withholding - who is an employee? Discusses the Commissioner's view on whether an individual is paid as an employee for the purposes of section 12-35 of Schedule 1 to the TAA 1953. Paragraph 15 explains that an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee.

Paragraph 26 of TR 2023/4 states that for section 12-35 of the TAA 1953 to apply, the payment must have been made as a consequence of the taxpayer's employment and as an individual in their capacity as an employee.

Schedule 5 - Tax table for back payments, commissions, bonuses and similar payments

The withholding requirements for Schedule 5, are in accordance with sections 15-25 and 15-30 of the TAA 1953. Schedule 5 applies to payments paid as a lump sum that are covered by subdivisions 12-B and 12-D of Schedule 1 to the TAA 1953.

Schedule 5 is applicable where a payment of salary and wages is made that is:

•         A back payment (including a lump sum payment in arrears)

•         A commission

•         A bonus or similar payment.

A back payment includes a payment that was meant to have been made in a prior period, including where an employee's wages are underpaid due to an error or oversight. A back payment is distinct from a bonus, which is a payment made for recognition of performance.

Ex gratia payments

Section 82-130 of the ITAA 1997 explains that a payment is considered an early termination payout (ETP) if it is received by you in consequence of the termination of your employment and it is received no later than 12 months after that termination. ETPs are typically not considered assessable where you receive them upon cessation of your employment.

You received a bonus that was labelled as an ex gratia payment, in respect of a salary and wage dispute with your employer.

An ex gratia payment is often one that is given as a favour or gift.

The term 'gift' is not defined in the ITAA 1997. Therefore, the word 'gift' takes its ordinary meaning. Rather than attempting to define a 'gift', the courts have described a gift as having the following characteristics and features:

•         There is a transfer of the beneficial interest in property

•         The transfer is made voluntarily

•         The transfer arises by way of beneficiation, and

•         No material benefit or advantage is received by the giver by way of return.

After considering the full circumstances of your ex gratia payment it is considered that the payment is not a true 'gift', but rather paid to you to settle your underpayment dispute with your employer. When you signed the Deed of Acknowledgment you entered into an agreement with your employer to release them from all claims relating to the dispute. Your employer allowed you to retain the payment received, noting that the alleged underpayment of salary and wages was due to a misunderstanding. Therefore, the ex gratia payment is not considered a 'gift'.

ATO Interpretative Decision 2003/263 demonstrates that an 'ex gratia' payment can be considered income. In that ATO Interpretative Decision the payer had no obligation to make the payment that they did but it was considered to be income of the recipient as the payment was meant to substitute for part of the recipient's salary.

Application to your circumstances

You received a payment from your employer after you lodged a claim regarding an underpayment of your salary and wages. Your employer undertook an investigation and determined that the payment was made due to a misunderstanding. Rather than seek a refund of the amount you received, you were permitted to retain the payment and your employer treated it as an ex gratia/bonus payment. All parties signed a Deed of Acknowledgment agreeing to the outcome of the investigation.

When determining if an amount is assessable income for an individual, the nature and character of the payment must be determined first to ascertain whether a withholding obligation arises under section 12-35 of Schedule 1 to the TAA 1953. That is, whether the payment is in the nature of salary, wages or bonus income which are considered remuneration in nature.

An investigation into your claims, determined that the payment you received, was not a payment that was meant to have been made to you. Thus, the amount has been correctly, added to your gross earnings for the relevant income year. Your employer was required to withhold tax, pursuant to section 12-35 of Schedule 1 of the TAA 1953.

Section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes ordinary and statutory income derived directly and indirectly from all sources during the income year. Whether the payment is either a bonus or ex gratia payment, the amount you received is also considered to be assessable income as per section 15-2 of the ITAA 1997.

In your case, your claims against your employer were in relation to an underpayment of income. You did not make any claims of a non-income nature. As all of your claims were in relation to income, any amount received as a result of making those claims is considered to be income. Therefore, the ex gratia payment is included in your assessable income.