Edited version of private advice

Authorisation Number: 1052342530810

Date of advice: 11 December 2024

Ruling

Subject: Compensation

Question 1

Is the interest component of the received lump sum payment considered assessable income pursuant to section 6-5 of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Answer 1

Yes.

This private ruling applies for the following period:

Year ended XX June 20XX

The scheme commenced on:

X July 20XX

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You were employed at a tertiary education provider between the period of 20XX to 20XX.

On or around X July 20XX, the tertiary education provider notified you that some of their employees did not receive their full entitlements under the relevant Enterprise Agreement.

You were identified as being one of the affected employees.

An audit was conducted and the tertiary education provider advised you that upon review, you were entitled to a back payment of $XX to account for lost wages.

On X August 20XX, you received a lump sum payment in the form of back payment.

Included in the lump sum was an interest payment of $XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Tax Administration Act 1953 section 15-2

Reasons for decision

Summary

The interest component of the lump sum received as a result of lost wages forms part of your ordinary income and is therefore considered assessable income.

Detailed reasoning

Section 6-5 of the ITAA 1997 provides that the assessable income of a taxpayer includes ordinary derived directly and indirectly from all sources during the income year.

Section 15-2 of the Tax Administration Act 1953 further 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.

Paragraph 237 of Taxation Ruling TR 95/35 states that interest is described as 'payment by time for the use of money' (Rowlatt J in Bennett v. Ogston(1930) 15 TC 374 at 379) In economic terms, interest is the return or compensation for the use or retention by one person of a sum of money belonging or owed to another. Paragraph 238 of Taxation Ruling TR 95/35 states that any interest awarded as part of compensation is interest within the general meaning of that term. It represents assessable income of the taxpayer even when the judgment provides only for a single lump sum which would otherwise be a capital receipt (Federal Wharf Co Ltd v. DFC of T (1930) 44 CLR 24; 1 ATD 70 and Riches v. Westminster Bank Ltd [1947] AC 390)

Application to your circumstances

You received a compensation payment resulting from loss of wages which included a portion of interest. In accordance with section 6-5 of the ITAA 1997 and TR 95/35, the interest component is assessable as ordinary income.