Private ruling: Assessable income
Date of advice: 4 August 2016
Published: September 2016
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Is the lump sum amount you received assessable under the capital gains tax provisions? | A1: Yes.

Relevant facts and circumstances: You worked for an organisation which classified you as a contractor. You ceased working with the organisation and commenced legal action against them. You commenced legal action on the basis that your employment status for the relevant years was that of an employee and you were entitled to receive annual leave and sick leave payments. As part of your legal action, you were seeking to recover annual leave, long service leave and redundancy payments you believed you were entitled to. You signed a settlement, release and discharge agreement. The Agreement included a clause which stated that in consideration of the settlement figure to be paid with a denial of liability to you by the other party, the parties agreed to finalise all actions, proceedings, claims, demands and damages which the parties had or may hereafter have against each other in respect of or arising out of the described incidents. Under the agreement you and your former employer acknowledge that the payment of the settlement figure is not an admission of liability by your former employer. The Agreement does not make any reference to salary, wages, annual leave, long service leave or redundancy payments in any of its clauses or Schedules.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 section 108-5

Reasons for decision: Summary: Receipt of a lump sum compensation or settlement amount will be considered to be a capital payment unless it can be identified as compensation for loss of income. Taxation Determination TD 93/58 provides that a lump sum compensation or settlement payment will only be assessable as income: to the extent that a portion of the lump sum payment is identifiable and quantifiable as income. This will be possible where the parties either expressly or impliedly agree that a certain portion of the payment relates to a loss of an income nature [cf. Mc Laurin v. FC of T (1961) 104 CLR 381; (1961) 8 AITR 180 and Allsop v. FC of T (1965) 113 CLR 341; (1965) 9 AITR 724]. In your case, you received a lump sum payment that was not apportioned in any way and there was no mention in the Agreement of any part of the payment being of an income nature. Consequently, the payment you received is of a capital nature and will be assessable under the capital gains tax (CGT) provisions. You pay tax on your capital gains. It forms part of your income tax and is not considered a separate tax, although it is generally referred to as capital gains tax (CGT). Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain is made only if a CGT event happens. A CGT event is generally something that happens in relation to a CGT asset, for example, disposing of the asset. For most CGT events, your capital gain is the difference between your capital proceeds and the 'cost base' of the CGT asset. Section 108-5 of the ITAA 1997 states that a CGT asset is any kind of property or a legal or equitable right that is not property. The right to seek compensation is a legal or equitable right and therefore an intangible asset. CGT event C2 happens if your ownership interest in an intangible CGT asset ends when the asset is released, discharged or satisfied (section 104-25 of the ITAA 1997). Taxation Ruling TR 95/35 discusses the CGT implications of compensation receipts and explains that the right to seek compensation is an asset for the purposes of the capital gains tax legislation. The right to seek compensation is the right of action that arises on the occurrence of any breach of contract, personal injury or other compensable damage or injury. The right is acquired at the time of the compensable wrong or injury, and includes all of the rights arising during the process of pursuing the compensation claim. The right to seek compensation is disposed of when it is satisfied, surrendered, released or discharged. In your case, you acquired the right to seek compensation at the time you commenced legal action against your former employer and you disposed of the right when you settled your claim. Therefore, CGT event C2 happened when you disposed of the right and the capital gain you made will be included in your assessable income.