Private ruling: Taxation of compensation payments
Published: November 2013
Ruling period: Year ended 30 June 2013.
Date scheme commenced: 1 July 2011

Ruling: Q1: Are the payments that you received included in your assessable income? | A1: Yes

Relevant facts and circumstances: You are incapacitated for work and remain medically unfit. You receive regular incapacity payments paid and there is tax deducted before being received by you. You are regularly medically reviewed to confirm your ongoing incapacity for work. You do not receive superannuation contributions as part of your compensation payment.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-1 | Income Tax Assessment Act 1997 Section 6-5

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. Ordinary income has been held to include income from providing 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: · are earned · are expected or relied upon · have an element of periodicity, recurrence or regularity · replace income. Payments of salary and wages are income according to ordinary concepts and are included in assessable income under section 6-5 of the ITAA 1997. An amount paid to compensate for loss generally acquires the character of that for which it is substituted ( FC of T v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts ( FC of T v. Inkster (1989) 20 ATR 1516; 89 ATC 5142; Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641; Case Y47 (1991) 22 ATR 3422; 91 ATC 433). In your case, you receive payments which are made to substitute earnings which were assessable as ordinary income. Accordingly these payments are included in your assessable income.