Private ruling: Compensation payments
Published: June 2012
Ruling period: Year ended 30 June 2011 | The scheme commenced on | 1 July 2010

Ruling: Q1: Is the retroactive payment assessable income? | A1: Yes. | Q2: Are the monthly compensation payments assessable income? | A2: Yes.

Relevant facts and circumstances: You were awarded compensation following the death of your partner. Your partner died a few years ago. The death of your partner was recognized as being attributable to the performance of official duties on behalf of an international organisation. The following amounts were paid: · a retroactive payment, and · a payment per month. The monthly payments will continue until your death or remarriage.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5. | Income Tax Assessment Act 1997 Section 6-15.

Reasons for decision: Detailed Reasoning - Compensation payments: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes the ordinary income they derived directly or indirectly from all sources, whether in or out of Australia, during the income year. The courts have identified a number of factors which indicate whether an amount is regarded as ordinary income. Characteristics of ordinary income that have evolved from case law include receipts that: · are earned, · are expected, · are relied upon, and · have an element of periodicity, recurrence or regularity. For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted ( Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; 10 ATD 82) ( Dixon's case ). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts ( Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; (1989) 20 ATR 1516; 89 ATC 5142, Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641, and Case Y47 (1991) 22 ATR 3422; 91 ATC 433). In Dixon's case it was found that even if the receipts are not directly attributable to employment or services rendered, the expected regular periodical payments had the character of ordinary income. Pensions and other living allowances may not be in connection with employment, yet are generally regarded as ordinary assessable income. In FC of T v. Blake (1984) 75 FLR 315, the characteristics of the payments in question were looked at to decide if they were assessable income. The periodical nature of the payment, the recipient's reliance or otherwise on the payment for regular expenditure on himself and his dependents, led to the decision that the payments were assessable income. In FC of T v. The Myer Emporium Ltd 87 ATC 4363, the Full High Court said (at p 4370): The periodicity, regularity and recurrence of a receipt has been considered to be a hallmark of its character as income in accordance with the ordinary concepts and usages of mankind. Another basic principle is that the character of the receipt must be determined from the point of view of the recipient and not from the standpoint of the payer or some other person. In Scott v. FC of T (1966) 14 ATD 286, Windeyer J expressed the view that whether or not a particular receipt is income depends upon its quality in the hands of the recipient. Taxation Determination TD 93/58 explains the circumstances in which a lump sum compensation payment is assessable, and states that such a payment is assessable income: · if the payment is compensation for loss of income only (even when the basis of the calculation of the lump sum cannot be determined), or · 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. In your case, you received a lump sum retroactive payment. The lump sum payment relates to the period that you were entitled to compensation following the death of your partner. You are now also receiving monthly compensation payments. The issue of whether the redemption or conversion of an entitlement to periodic payments to a lump sum affects assessability was considered in Coward v. FC of T 99 ATC 2166; (1999) 41 ATR 1138. In that case Mathews J found that payments made to replace income take on the character of the payment they replace and that the method of payment does not alter the character of the payment. Mathews J held that as the weekly compensation payments made to the appellant until he turned 65 were paid for loss of earnings and thus constituted income, a lump sum representing redemption of those future weekly payments was also income. This is consistent with the approach taken by the Commissioner in Taxation Determination TD 93/3 which deals with the partial commutation of periodic payments to a lump sum. As outlined in paragraph 4 of TD 93/3, such a commutation would result in the lump sum remaining assessable, as its effect was simply to pay in advance the future weekly payments. The compensation payments you received provide an income support which you will be able to rely on for your day to day living expenses. Although you did not directly earn the payments, the regularity of your monthly payments and the full circumstances surrounding your case indicate an income nature. The monthly payment is expected and relied upon. Your monthly compensation payments have the major characteristics of ordinary income identified above and the payments are therefore assessable under subsection 6-5(2) of the ITAA 1997. The lump sum compensation payment represents the payments you were entitled to in previous years. Although these amounts have been given to you as a lump sum, the conversion to a lump sum does not change the character of the payment. Therefore, where past regular payments are ordinary income and paid as a lump sum, the lump sum payment also retains the character of being ordinary income. Consequently, your lump sum payment is also assessable as ordinary income under subsection 6-5(2) of the ITAA 1997. Subsection 6-15(2) of the ITAA 1997 provides that any income that is exempt income will not be included in assessable income. Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Some payments, for example, certain war time compensation payments are specifically exempted under the ITAA 1997. There are no provisions that make your compensation payments exempt income. Therefore your compensation payments are regarded as ordinary assessable income.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.