Private ruling: Assessability of compensation payments
Published: March 2014
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017
Date scheme commenced: 1 July 2013

Ruling: Q1: Are the compensation payments you receive from the scheme assessable? | A1: Yes

Relevant facts and circumstances: You became a resident of Australia for taxation purposes a number of years ago. You purchased a 'with profits life lifetime annuity' a number of years ago overseas. You receive regular payments from the annuity following the maladministration of the insurance company and the payments have reduced since 20XX. The relevant country's government set up the scheme to help cover the losses incurred by the policy holder. You have received compensation payments and will continue to receive the payments for life.

Relevant legislative provisions: Income tax Assessment Act 1997 Section 6-5 | Income tax Assessment Act 1997 Subsection 6-5(2) | Income tax Assessment Act 1997 Subsection 6-5(4)

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 includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources, whether in or out of Australia, during the income year. 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 • are expected • are relied upon, and • have an element of periodicity, recurrence or regularity. Payments of annuity proceeds are ordinary income as they are relied upon by you, expected by you and are received on a regular basis. Receipts that are not annuity proceeds , but are paid as a substitute for annuity proceeds that would normally have been earned, expected and relied upon by a taxpayer, are also assessable as ordinary income. The general principle is that such payments take on the character of the annuity proceeds they replace. That is, if the substituted amount was an amount of ordinary income, the amount paid to compensate for the loss of that amount will also be ordinary income. In your case the compensation you receive from the payment scheme compensates you for the loss you have incurred due to the maladministration of the fund and the reduction in the proceeds you would have received. As the payment is compensating you for income that would have been assessable income, this payment is therefore treated as also being assessable income and must be included in your income tax return in the year that you received the payments.