ATO ID 2003/263: Income Income : Ex-gratia payment to deployed AFP officer working in East Timor
Date of decision: 12 March 2003
Year of income: Year ended 30 June 2002
Business line: Small Business/Individual Taxpayers

Issue
Is an ex-gratia payment made to compensate the taxpayer, an Australian Federal Police (AFP) officer, for tax they paid while serving in East Timor assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. An ex-gratia payment made to compensate the taxpayer, an AFP officer, for tax they paid while serving in East Timor is assessable income under section 6-5 of the ITAA 1997

Facts
The taxpayer is an AFP officer. They served with the United Nations in East Timor for a period less than 91 days. They paid tax on the income they received during the period they were in East Timor. The Commonwealth Government decided to make an ex gratia payment to the taxpayer to compensate them for the tax paid in regard to this income.

Reasons for decision
Summary: Under subsection 6-5(2) of the ITAA 1997 the assessable income of an Australian resident includes income according to ordinary concepts received from all sources, whether in or out of Australia, during the income year. Whether a voluntary payment is income according to ordinary concepts depends on the character of the payment in the hands of the recipient ( Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514; (1966) 14 ATD 286; (1966) 10 AITR 367). In Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; (1952) 10 ATD 82 the taxpayer voluntarily joined the army. His former employer made a series of payments to him equal to the difference between his salary prior to joining the army and his army salary. The High Court held that the payments were assessable income in the hands of the taxpayer, Fullagar J said: What is to my mind, decisive is that the expressed object and the actual effect of the payments made was to make an addition to the earnings, the undoubted income, of the respondent. What the employing firm decided to do, and what it really did, in relation to the respondent and others in the same position was " to make up the difference between their present rate of wages and the amount they will receive". What is paid is not salary or remuneration, and it is not paid in respect of or in relation to any employment of the recipient. But it is intended to be, and is in fact, a substitute for - the equivalent pro tanto of - the salary or wages which would have been earned and paid if the enlistment had not taken place. As such, it must be income, even though it is paid voluntarily and there is not even a moral obligation to continue making the payments. It acquires the character of that for which it is substituted and that to which it is added. The ex-gratia payment made to the taxpayer is aimed at making up the difference between what the taxpayer received and what they would have received if their income had been exempt. The payment is a substitute for the salary that went to pay their income tax and acquires the character of that for which it is substituted. Accordingly the amount is considered to be income according to ordinary concepts and assessable under section 6-5 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 section 6-5 subsection 6-5(2)
Case references: Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514 (1966) 10 AITR 367 (1966) 14 ATD 286
Subject references: Ex gratia payments Foreign income