Edited version of private advice

Authorisation Number: 1052320313448

Date of advice: 21 October 2024

Ruling

Subject:Assessable income

Question 1:

Are either of the lump sum payments assessable as income under section 6-5 or section 10-5 of the Income tax Assessment Act 1997?

Answer:

No.

Question 2:

Are the monthly maintenance payments of Amount 4 exempt from income tax?

Answer:

Yes.

This ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You were married to Person A.

You travelled overseas to Country X with Person A for their employment, living there for some years.

You were not a resident of Australia for taxation purposes during your period in Country X.

You and Person A separated.

You and Person A entered into a settlement agreement (the Settlement Agreement) under which:

•                     Person A was to pay you two specified amounts totalling Amount 1, with the first payment of Amount 2 to be paid on a specified date, and the other amount, being Amount 3, to be paid on a specified date; and

•                     Person A was to pay specified monthly maintenance amount to you every month, each monthly payment being Amount 4, for 12 months each year on or before day 3 of each month for a specified number of years, starting from a specified date.

Amount 1 included in the Settlement Agreement was intended to cover the costs for you to relocate yourself and your pet from Country X to Australia.

You received the first payment, being Amount 2, while you were in Country X.

You returned to Australia and became a resident of Australia for taxation purposes.

You commenced receiving the monthly maintenance payments of Amount 4 in each month in accordance with the Settlement Agreement from the specified date and will continue to receive them during the ruling period, and beyond.

You received the payment of Amount 3 in accordance with the Settlement Agreement.

Your divorce from Person A was granted in Country X.

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 6-15

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1997 section 51-30

Income Tax Assessment Act 1997 section 51-35

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-20

Income Tax Assessment Act 1997 subsection 118-75(1)

Reasons for decision

Question 1: Is the payment of Amount 3 assessable as income under section 6-5 or section 10-5 of the Income tax Assessment Act 1997?

Assessable income

Assessable income includes ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) and statutory income under section 6-10 of the ITAA 1997.

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Ordinary income has generally been held to include 3 categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of 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.

Statutory income is not ordinary income but is included in assessable income by a specific provision in the tax legislation (subsection 6-10(2) of the ITAA 1997).

Section 10-5 of the ITAA 1997 lists the provisions for assessable income, which includes section 102-5 of the ITAA 1997 for capital gains.

Under section 6-15 of the ITAA 1997, if an amount is not ordinary income nor statutory income it is not assessable income, being exempt, and you do not have to pay tax on it.

Capital gains tax

Capital gains tax (CGT event C2) happens if a taxpayer ' s ownership of an intangible CGT asset ends because the asset expires or is redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered or forfeited under section 104-25 of the ITAA 1997.

A CGT asset under section 108-5 of the ITAA 1997 includes a right to seek compensation or the right to a chose in action.

Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts provides that a compensation receipt, or compensation, includes any amount (whether money or other property) received by a taxpayer in respect of a right to seek compensation or a chose in action, or any proceeding instituted by the taxpayer in respect of that right or cause of action. The disposal of such rights will trigger CGT event C2.

Marriage breakdown settlements

A capital gain or capital loss that is made on a right ending is disregarded if certain conditions are met in relation to marriage or relationship breakdown settlements as a result of a CGT event C2 occurring. This means that these settlements do not give rise to CGT liabilities.

Specifically, a capital gain or capital loss a taxpayer makes as a result of CGT event C2 happening in relation to a marriage breakdown is disregarded under subsection 118-75(1) of the ITAA 1997 if:

a)            the gain or loss the taxpayer makes relate to a right that directly relates to the breakdown of a relationship between spouses, and

b)            at the time of the CGT event:

(i)             the taxpayer and their spouse or former spouse are separated, and

(ii)             there is no reasonable likelihood of cohabitation being resumed.

Example

Maude receives an amount from Claude by way of a settlement directly related to the breakdown of their marriage. CGT event C2 would happen to Maude on satisfaction of her legally enforceable right to the amount. Any capital gain or loss that Maude makes in these circumstances is disregarded.

Application to your situation

In your situation you and Person A separated, with your divorce being finalised after you had returned to Australia.

You and Person A entered into the Settlement Agreement under which he would pay you two specified amounts, being Amount 2 and Amount 3.

You received Amount 2 while you were not a resident of Australia for taxation purposes, which is therefore not assessable in Australia.

You received Amount 3 after you became a resident of Australia for taxation purposes.

The payment of Amount 3 does not have the characteristics of ordinary income. Although the payment can be said to be expected, and perhaps relied upon, this expectation arises from the divorce settlement between you and Person A, rather than from any services you performed. Therefore, the lump sum payment is not ordinary income and is not assessable under subsection 6-5(2) of the ITAA 1997.

The amount is capital in nature and the taxation implications under the CGT provisions are considered below.

When you entered into the Settlement Agreement and agreed to receive the payment of this amount you disposed of your right to seek compensation or the right to a chose in action, and a CGT event C2 occurred.

The conditions in subsection 118-75(1) of the ITAA 1997 as outlined above have been met in this situation. Therefore, you can disregard any capital gain or loss made on the receipt of Amount 3 from Person A.

There are no other provisions listed under section 6-10 of the ITAA 1997 which would apply to Amount 3, and it is therefore not considered to be statutory income.

As Amount 3 is not viewed as being either ordinary income or statutory income it is not assessable.

Question 2: Are the monthly maintenance payments of Amount 4 exempt from income tax?

Maintenance payments made to an ex-spouse

Section 51-30 of the ITAA 1997 provides that periodic maintenance payments received by an individual are exempt from income tax. This exemption is subject to conditions set out in section 51-50 of the ITAA 1997, which effectively confines the exemption to payments made by an individual to their child or spouse's child, or to an ex-spouse or ex spouse's child.

The exemption further requires that, in order for these payments to be exempt, the maintenance payer must not have divested income producing assets or diverted income upon which the maintenance payer would otherwise have been liable to income tax. Thus, where the conditions imposed by section 51-50 of the ITAA 1997 are not met, the recipient becomes liable to pay income tax on the income.

Application to your situation

In accordance with the Settlement Agreement, Person A will pay you the monthly maintenance amounts of Amount 4.

As Person A is making the payments directly to you, being their ex-spouse, these amounts are exempt from income tax under section 51-30 of the ITAA 1997.

Conclusion

As outlined above, the following amounts are not assessable and do not need to be included in your income tax returns in the income years covered by the ruling period:

•                     The payment of Amount 3 you received from Person A, or

•                     The monthly maintenance payments of Amount 4 you commenced receiving from Person A from the date specified in the Settlement Agreement and will continue to receive those monthly payments until the end of the ruling period in accordance with the Settlement Agreement.