ATO ID 2002/853: Assessability of Customer Service Guarantee Payment
Date of decision: 2 August 2002
Year of income: Year ended 30 June 2001
Business line: Small Business/Individual Taxpayers

Issue
Is the receipt of damages paid by a telephone company as a result of a breach of the Telecommunications (Customer Service Guarantee) Standard 2011 (CSG) included in the assessable income of the taxpayer under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
No. Damages paid by the telephone company as a result of a breach of the CSG are not included in the assessable income of the taxpayer under section 6-5 of the ITAA 1997 as the payment is not ordinary income.

Facts
The Australian Communications and Media Authority issued a CSG that applies to telephone companies for the supply of standard fixed-line telephone services as well as five specified enhanced call handling features. The telephone company is bound by the CSG. Should the telephone company fail to comply with the CSG they are required to pay damages to the customer. The telephone company failed to meet the required standard under the CSG in relation to the connection of a private home telephone. The telephone company was required to pay damages to the taxpayer as a result of this breach of the CSG. The damages payment made by the telephone company to the taxpayer was not in any way made in return for the taxpayer relinquishing their rights to seek further damages from the telephone company.

Reasons for decision
Summary: 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: A compensation amount generally bears the character of that which it is designed to replace ( Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; [1952] HCA 65; (1952) 10 ATD 82; (1952) 5 AITR 443). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts ( FC of T v. Inkster (1989) 24 FCR 53; [1989] FCA 423; (1989) 89 ATC 5142; (1989) 20 ATR 1516; Tinkler v. FC of T (1979) 40 FLR 116; [1979] FCA 88; 79 ATC 4641; (1979) 10 ATR 411 and Case Y47 91 ATC 433; AAT Case 7328 (1991) 22 ATR 3422). The payment the taxpayer received from the telephone company by way of damages was not made as compensation for any loss of income. The taxpayer received the payment as a result of the telephone company failing to comply with the required service standard under the CSG. Further to this, the damages amount does not have the characteristics of ordinary income. It is a one off lump sum payment and is not expected or relied upon. The damages only became payable as a result of a breach of the CSG by the telephone company and were not a reward for the performance of any services by the taxpayer. The damages amount paid by the telephone company as a result of the breach of the CSG is not ordinary income and therefore is not included in the taxpayer's assessable income under section 6-5 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 section 6-5 subsection 6-5(2)
Case references: Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540 [1952] HCA 65 (1952) 10 ATD 82 (1952) 5 AITR 443
Related public rulings and determinations: Taxation Ruling TR 95/35
Subject references: Income Compensation income Damages income