ATO ID 2004/512: Assessability of an act of grace payment
Date of decision: 10 May 2004
Year of income: Year ended 30 June 2004
Business line: Small Business/Individual Taxpayers

Issue
Is an act of grace payment approved under section 33 of the Financial Management and Accountability Act 1997 (FMAA 1997) assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
No. The act of grace payment approved under section 33 of the FMAA 1997 is not assessable under section 6-5 of the ITAA 1997 as it is not ordinary income.

Facts
As a result of information provided by a government department the taxpayer considered that they were eligible and applied for a pension administered by that department. After a formal consideration of their claim it was decided that they were not in fact eligible. After a review it was considered that, based on the information provided by the department, it was reasonable for the taxpayer to have concluded that they were eligible for the pension when they were not. In view of this, an act of grace payment was approved under subsection 33(1) of the FMAA 1997 to redress the situation that resulted from the misleading information which had been provided by the department. While the payment was calculated by reference to the amount of pension the taxpayer would have received if they had been eligible, it was not paid in substitution of that pension. The payment was made as a lump sum.

Reasons for decision
Summary: Subsection 6-5(1) of the ITAA 1997 defines assessable income as including income according to ordinary concepts (ordinary income). There are a number of factors which can assist in determining whether a particular receipt is ordinary income. These include: An act of grace payment under section 33 of the FMAA 1997 is a voluntary payment made by the Commonwealth where there is a moral obligation rather than a legal obligation to do so. Whether a voluntary payment is assessable income was considered in Dixon's Case . In holding that the amount was assessable income Dixon CJ and Williams J held that four factors were relevant: In looking at these four factors in the circumstances here it is considered that the payment is not ordinary income as: Accordingly, the payment is not assessable income under section 6-5 of the ITAA 1997 as it is not ordinary income.

Legislative references: Income Tax Assessment Act 1997 section 6-5
Case references: FC of T v. Harris (1980) 10 ATR 869 80 ATC 4238
Subject references: Assessable income Lump sum payments