Edited version of private advice

Authorisation Number: 1052375379125

Date of advice: 20 March 2025

Ruling

Subject: Assessable income

Question 1

Is the payment received under the deed of settlement and release assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

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 owned units in a unit trust.

You have entered into a deed of settlement and release with the unit trust.

You have given notice for the redemption of your units.

The recitals for the deed of settlement and release state that you are entitled to participate in a proportion of the distributions of the profits but the books and records were not finalised at the date of the deed.

The unit trust has agreed to pay a settlement to you in order to resolve any claims you may have.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes the ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

An amount paid to compensate for loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; (1952) 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (Federal Commissioner of Taxation v. Inkster 89 ATC 5142; (1989) 20 ATR 1516 and Tinkler v. Federal Commissioner of Taxation 79 ATC 4641; (1979) 10 ATR 411).

Taxation Determination TD 93/58 Income tax: under what circumstances is the receipt of a lump sum compensation/settlement payment assessable? outlines the circumstances under which the receipt of a lump sum compensation/settlement payment is assessable as ordinary income. The determination states that where the compensation payment is for loss of income, the amount is assessable as ordinary income. Where a portion of a lump sum payment is identifiable and quantifiable as income, that portion of the payment will be assessable.

In this case, the deed of settlement and release states you were entitled to a portion of the profits of the unit trust that had yet be finalised. The settlement sum is in full satisfaction for any claims that you have against unit trust.

In considering all circumstances, the settlement payment has the character of assessable income as it is replacing a distribution of profits which is an income receipt. Accordingly, the settlement payment is received on revenue account and is assessable ordinary income under section 6-5 of the ITAA 1997.