Private ruling: Assessability of settlement payment
Published: August 2011
Ruling period: 1 July 2011 to 30 June 2012.
Date scheme commenced: 1 July 2011.

Ruling: Question and answer: | Is the lump sum compensation payment you will receive under a Release Agreement included in your assessable income? | No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5. Income Tax Assessment Act 1997 Section 102-5. Income Tax Assessment Act 1997 Section 118-37.

Reasons for decision: Detailed Reasoning - Assessable income - general: The assessable income of an Australian resident taxpayer may include amounts of ordinary and statutory income. Salary and wages are an example of ordinary income and are included in a taxpayer's assessable income under the provisions of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Capital gains are an example of statutory income and are included in a taxpayer's assessable income under the provisions of section 102-5 of the ITAA 1997. | Detailed Reasoning - Assessability of compensation payments: Compensation payments which are a substitute for income (salary and wages for example) have been previously held by the courts to be assessable as ordinary income ( 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). This position by the courts is reflected in Taxation Determination TD 93/58 Income tax: under what circumstances is the receipt of a lump sum compensation/settlement payment assessable? Taxation Determination TD 93/58 specifies that such a payment will be assessable as ordinary income: · if the payment is for loss of income only, or · to the extent that a portion of the payment is identifiable and quantifiable as being related to a loss of income. No portion of the payment you will receive is for loss of income as the amount will be paid to you for hurt, suffering and humiliation. Accordingly, no portion of the payment will be included as ordinary income in your assessable income. Settlement amounts received that can not be directly attributed to a loss of income will usually be capital in nature and potentially taxable as statutory income under the capital gains tax provisions of the ITAA 1997. However, subsection 118-37(1)(a) of the ITAA 1997 provides that a taxpayer may disregard any capital gain arising from the receipt of compensation paid as a result of any wrong or injury suffered in their occupation. You were sexually harassed at work and the payment is being made to you as a result of hurt, suffering and humiliation. It can be said therefore that the payment is being made to you because of a wrong and associated injury you suffered in your occupation. As a result, you can disregard any capital gain arising from the payment. | Detailed Reasoning - Conclusion: No portion of the lump sum amount will be included in your assessable income for taxation purposes.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns . | You lodged a sexual harassment complaint against your employer. | You have reached an agreement to settle your complaint. | You intend to sign an agreement under which you will receive a lump sum amount (the payment) in exchange for full and final settlement of any claims against your employer that may arise out of your complaint. | The payment is for hurt, suffering and humiliation.