Edited version of private advice

Authorisation Number: 1052294870363

Date of advice: 12 September 2024

Ruling

Subject: Assessable income - gratuitous payment

Question

Is your gratuitous payment you received as compensation for the loss of yield assessable under subsection 6-5(1) of Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

You received a lump sum payment (with no interest component) which bears none of the characteristics of ordinary income as it lacks any element of periodicity, recurrence, or regularity, and nor has it been paid to compensate you for loss of income; rather it is a payment received to surrender your right to seek action against Company C and/or Company A.

Accordingly, the one-off lump sum payment you received is not assessable under subsection 6-5(1) of the ITAA 1997, it is a capital receipt and is therefore assessable as statutory income under section 102-5 of the ITAA 1997.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You operate a primary production business. You provided us with details on the address you operate the business from and when the business commenced.

In a specified season, a specified number of hectares of your land was planted with AA seeds. You provided us with details on the expected total yield of a specified tonnes per hectare of the AA seeds.

In the same season, you made a decision to plant a larger crop of AA seeds with an expectant yield of the same as the previous season.

You purchased the AA seeds from Company A for planting. You provided us with details on the minimum tonne to the hectare that the AA seeds were expected to produce. The expected tonne to the hectare was based on information supplied to you by the Person A, an agronomist with Company A.

You were advised by Person A that a farmer within close proximity to your farm had a crop generating a yield of a specified tonne to the hectare.

You planted the AA seeds on a specified number of hectares of your land, however the crop did not produce the expected yield. The crop only produced specified quantity of tonne to the hectare, which was considerably less than the expected quantity advised by Person A.

You were concerned regarding the yield and contacted your supplier Company A. Company A then employed an independent agronomist from Company B to determine if there were any mitigating factors as to why the crop did not produce the expected yield.

You provided us with the details on the findings from Company B.

Company B assessed the loss you incurred based on the Company C's trial site. Company B assessed the loss to be a specified amount. You did not accept the assessment of the loss by Company B as it was not sufficient to cover the loss of the yield.

You supplied additional information to Company B who then recalculated the loss that you incurred and assessed the loss to be a higher amount.

The producer of the seed Company C conceded that you had suffered a loss and in good faith offered a gratuitous payment of a specified amount based on the report by Company B, the payment was not an acceptance of liability. The payment was to be made on the condition that you sign a settlement agreement.

You provided the report prepared by Company B, Company C's letter to you for the settlement amount and a copy of the settlement agreement.

You provided us with an executed copy of the settlement agreement between you and Company C, which was executed on a specified date.

You provided us with the date that you received the gratuitous payment. The payment did not contain an interest component.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 104-25