Edited version of private advice

Authorisation Number: 1052333031679

Date of advice: 19 November 2024

Ruling

Subject: Assessable income and foreign income tax offset

Question

Is the entirety of the settlement amount you received from a class action lawsuit in Country X assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question

Are you entitled to a foreign income tax offset (FITO) for the tax that you paid in Country X?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You live in Australia are an Australian resident for tax purposes.

You lived in Country X prior to relocating to Australia.

Whilst you were living in the Country X, you were employed at Company A and received a salary that was paid on an hourly basis.

In XX/20XX, you received a settlement cheque for $XXXX that was related to a class action lawsuit against Company A that was settled in Country X. This payment was received after you had become an Australian resident for tax purposes.

The class action related to underpayment of overtime wages of Company A's employees who were eligible for overtime pay and received restricted stock units (RSU's).

You were advised by the settlement administrator that for tax purposes, half of the settlement amount was classified as taxable wages income, and the other half was classified as non-taxable miscellaneous income.

You were also advised by the settlement administrator that the wages component of the payment is intended to settle claims for unpaid wages and the non-wages portion is intended to settle claims for all interest, liquidated damages, and penalties.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 770-10(10)

International Tax Agreements Act 1953

Reasons for decision

Question 1- assessable income

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 three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

The ITAA 1997 does not provide specific guidance on the meaning of ordinary income. However, a substantial body of case law exists which identifies its likely characteristics. Amounts that are periodic, regular or recurrent and relied upon by the recipient for their regular expenditure are likely to be ordinary income. So too are amounts that are the product of any employment of, or services rendered by, the recipient. Further, amounts which compensate for lost income or serve as a substitute for other income are themselves income according to ordinary concepts.

Application to your circumstances

In XX/20XX, you received a settlement sum that was related to a class action lawsuit against your previous employer. Amounts which compensate for lost income or serve as a substitute for other income are themselves income according to ordinary concepts.

Therefore, the wage portion and non-wage portion of the settlement payment you received is considered ordinary income and is assessable under subsection 6-5(2) of the ITAA 1997.

Question 2- foreign income tax offset.

Subsection 770-10(1) of the ITAA 1997 provides that a foreign income tax offset can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income in the income year.

Note 1 of subsection 770-10(1) states that the offset is for the income year in which your assessable included an amount in respect of which you paid foreign income tax- even if you paid the foreign tax in another year.

Foreign income tax is a tax imposed by a law other than an Australian law, on income or profits or gains. The taxpayer must have paid the foreign income tax before an offset is available. A taxpayer is deemed to have paid the foreign income tax if the foreign income tax has been withheld from the income at its source.

Article X of the Country X Convention deals with the elimination of double taxation.

Article X of the Country X Convention provides that where Country X tax has been imposed in respect of Country X sourced income in accordance with Article X of the Country X Convention other than Country X tax imposed solely by reason of citizenship or by reason of an election by an individual under Country X domestic law to be taxed as a resident of Country X, in respect of income derived from sources in Country X by a resident of Australia shall be allowed, a credit against Australian tax payable on that income. The credit shall be in accordance with the provisions and subject to the limitations of the law of Australia as it may be in force.

Application to your circumstances

As you are required to pay income tax in Country X on the income you received from your settlement payment, you can apply for a foreign income tax offset in Australia against the tax payable on that income.