Private ruling: Compensation payment
Published: September 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Does the compensation payment you received form part of your assessable income? | A1: No.

Relevant facts and circumstances: After you ceased employment you made a complaint to the Australian Human Rights Commission against your former employer alleging disability discrimination at work (the complaint). You agreed to resolve the complaint and the proceedings against your former employer. Under the Deed of Release your former employer agreed to pay you a lump sum as a general damages payment in settlement of the matters relating to the complaint. The Deed of Release did not provide details of how the lump sum amount was calculated.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Paragraph 118-37(1)(b)

Reasons for decision: Summary: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), provides that the assessable income of a taxpayer includes income according to ordinary concepts. Ordinary income has generally been held to include three categories, namely, income from rendering 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, expected, relied upon and have an element of periodicity, recurrence or regularity. In your situation the payment was in lieu of a claim for discrimination. The payment was not earned by you as it does not relate to services performed. The payment is also a one off payment and thus it does not have an element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation does not arise from a relationship to personal services performed. Accordingly, the payment is not ordinary income and is therefore not assessable under section 6-5 of the ITAA 1997. Taxation Ruling TR 95/35 deals with the capital gains treatment of compensation receipts. The ruling advocates a 'look-through' approach, which identifies the most relevant asset to which the compensation amount is most directly related. Paragraph 11 of TR 95/35 states that if an amount is not received in respect of an underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation. As the amount received is not in respect of any underlying asset, the whole of the settlement amount is treated as capital proceeds from a capital gains tax (CGT) event happening to the right to seek compensation. However, paragraph 118-37(1)(b) of the ITAA 1997 disregards a capital gain made from a CGT event where the amount relates to compensation or damages received for any 'wrong, injury or illness you suffer personally'. As such, CGT implications with regards to the payment are disregarded. The compensation payment you received is not assessable income.

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