Private ruling: Assessable income
Date of advice: 7 March 2019
Published: May 2019
Ruling period: Year ending 30 June 2019
Date scheme commenced: 1 July 2018

Ruling: Q1: Will the funds received from your settlement be treated as capital proceeds from any capital gains tax event in Section 102-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Are the funds received from your settlement ordinary income as per section 6-5 of the ITAA 1997? | A2: Yes

Relevant facts and circumstances: You are a sculptor. You created an artwork. You were paid for the artwork. It was placed in the foyer of a building. The building owners destroyed your artwork. This was done without you being provided with a reasonable opportunity to remove the work from the place where it was situated. You say the payment is to repair your public reputation. This was in contravention of the Copyright Act 1968 . Moral rights protect the personal relationship between a creator and their work even if the creator no longer owns the work, or the copyright in the work. Moral rights concern the creator’s right to be properly attributed or credited, and the protection of their work from derogatory treatment. Moral rights are distinct from the economic rights included in copyright. The payer agreed to pay you to enable you “to produce a new work for a public position” The Deed of settlement states: ● You will provide an invoice to the entity ● Your obligations in relation to the Settlement Sum includes – You will create a Public Artwork (or Public Artworks) using funds from the Settlement Sum; and – You will donate that Public Artwork (or Public Artworks) to the Recipient (or Recipients). – You must notify XXXXX in writing of the details: – If, within 18 months of receiving of the Settlement Sum, you have not entered into an agreement may be able to create an Artwork (or Artworks) for in the course of his artistic practice generally.

Relevant legislative provisions: Income Tax Assessment Act Section 6-5 | Income Tax Assessment Act Section 6-10 | Income Tax Assessment Act Section 10-5 | Income Tax Assessment Act Section 102-5 | Income Tax Assessment Act Section 102-20 | Income Tax Assessment Act Section 108-5 | Income Tax Assessment Act Paragraph 118-37(1)(a) | Copyright Act 1968 Division 6 | Copyright Act 1968 Section 195AK | Copyright Act 1968 Section 195AO | Copyright Act 1968 Section 195AP | Copyright Act 1968 Section 195AQ | Copyright Act 1968 Section 195AT | Copyright Act 1968 Section 195AZA

Reasons for decision: Summary: You are in the business of creating sculptures. The funds received from the Deed of Settlement are for the creation of an artwork to donate or sell. Funds you receive to create artwork cannot be a capital payment when you are an artist and this is your business - this is ordinary assessable income. The CGT exemption found in section 118-37 of the Income Tax Assessment Act 1997 (ITAA 1997) for damages and wrongs cannot apply if the funds received are not considered capital in nature. The funds received from the settlement are ordinary assessable income as per section 6-5 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Ordinary income Section 6-5 of the ITAA 1997 provides that the assessable income includes income according to ordinary concepts. Several types of receipts are not income for taxation purposes as they do not have the characteristics of ordinary income and they are not statutory income. 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. Whether the payment is a receipt of a capital or income nature in turn depends upon consideration of all the circumstances surrounding the payment. Amounts that are not ordinary income, but are included in your assessable income by another provision are called statutory income (section 6-10 of the ITAA 1997). The provisions dealing with statutory income are listed in section 10-5 of the ITAA 1997. Included in this list are capital gains, section 102-5 of the ITAA 1997. Capital gains tax (CGT) provisions Your assessable income includes your net capital gain for the income year (section 102-5 of the ITAA 1997). Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a CGT event happens. Section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property, or a legal or equitable right that is not property. For income tax purposes, a compensation amount generally bears the character of that which it is designed to replace. Taxation Ruling TR 95/35 , Income tax: capital gains: treatment of compensation receipts in dealing with the taxation treatment of compensation receipts, suggests the assessability of a lump sum in the hands of the recipient depends on whether it is a receipt of capital or income nature. It is the character of the receipt in the hands of the recipient that must be determined: FCT v. Slaven (1984) 52 ALR 81; 15 ATR 242; 84 ATC 4077 ( Slaven's case ). Generally, the material factor in determining whether compensation is of an income or capital nature is not the measure of the compensation, but what it is truly paid for: Glenboig Union Fireclay Co Ltd v. IR Commrs (1921) 12 TC 427. In TR 95/35 the term 'underlying asset' is used. Paragraph 70 says that “ in determining the most relevant asset it is often appropriate to adopt a ‘look through’ approach to the transactional arrangement with generates the compensation receipt. We regard this concept as the most appropriate basis on which to determine whether any capital gain arises on the disposal of any asset of the taxpayer.” The question of whether the payment in question in this case is capital or income will depend upon whether it can be said to be characterised as payment for deprivation or impairment of earning capacity or in whole or partial substitution of earnings which would have been earned but for the event which gave rise to the payment. CGT Exemption Under paragraph 118-37(1)(a) of the ITAA 1997 a capital gain is disregarded if it is compensation or damages you receive for: (i) any wrong or injury you suffer in your occupation; or (ii) any wrong, injury or illness you or your relative suffers personally. It is considered that a wrong suffered personally by a taxpayer means a wrong suffered ‘to his or her person’. Taking into account this context, it is considered a wrong suffered personally for the purposes of paragraph 118-37(1)(a) of the ITAA 1997 would not include damages that directly causes financial loss, as unlike injury or illness, it is not a wrong suffered by a taxpayer to his or her person. In the case of Purvis v. FC of T [2013] AATA 58 ( Purvis’ case) , the Administrative Appeal Tribunal considered the tax consequences of a pilot receiving a lump sum insurance payment for the loss of licence. Although the loss of licence came about as a result of illness or injury, the Tribunal found that the payment did not relate directly to compensation or damages within paragraph 118-37(1)(a) of the ITAA 1997. The amount was calculated without regard to the nature of the personal injury suffered, save that the personal injury had to result in the loss of licence. | Detailed Reasoning - Moral rights: Moral rights arise automatically under the Copyright Act 1968 (Copyright Act). Division 6 of the Copyright Act allows for three types of moral rights: ● Infringement of right of attribution of authorship, infringement of right not to have authorship falsely attributed, and infringement of right of integrity of authorship. The infringement of right of integrity of authorship is the right of an author to ensure that his/her work is not subjected to derogatory treatment which is any act in relation to the work that is in any manner harmful to the author's honour or reputation. Derogatory treatment is defined in Section 195AK of the Copyright Act as: "(a) the doing, in relation to the work, of anything that results in a material distortion of, the destruction or mutilation of, or a material alteration to, the work that is prejudicial to the author’s honour or reputation; " The Copyright Act allows certain acts which would otherwise constitute an infringement of the moral right of integrity if certain notification requirements are followed. The Copyright Act states that the owner of a moveable artistic work may destroy it without infringing the creator’s moral right of integrity in that artistic work if they first gave the author, or a person representing the author, a reasonable opportunity to remove the work from the place where it was situated. In relation to artistic works that are affixed to or form part of a building, The Copyright Act in Section 195AT provides for a process that should be followed by the owner of the building in relation to any change in, or the relocation, demolition or destruction of, such sculptures or installations. The building owner is required to make reasonable inquiries to discover the identity and location of the author and, if they locate the author, they must give the author 3 weeks within which the author can make a record of the work and consult in good faith with the owner of the building about the removal or relocation of the work. Section 195AZA of the Copyright Act allows for the following remedies for infringement of moral rights: (a) an injunction (subject to any terms that the court thinks fit); (b) damages for loss resulting from the infringement; (c) a declaration that a moral right of the author has been infringed; (d) an order that the defendant make a public apology for the infringement; (e) an order that any false attribution of authorship, or derogatory treatment, of the work be removed or reversed. | Detailed Reasoning - Your position: In your case you were not afforded the opportunity to remove the work or relocate the work. You say you are the settlement payment is to repair your public reputation. Your opinion is that is a settlement payments is a damages payment and is not liable for income tax. You say that the compensations was for damages for loss resulting from the infringement (to your reputation) that is; a capital payment, and that therefore the CGT exemption found in section 118-37 of the ITAA 1997 applies as it is compensation for damages or wrongs. You stated: ● they are paying the compensation to enable you to repair the damage to your reputation caused by the destruction of your work ● the settlement amount is only 60 percent of the estimated costs of reproducing the destroyed work ● that if you accepted “a pure damages payment without any conditions” you would have most likely received less. | Detailed Reasoning - Application to your situation: In your case you were not afforded the opportunity to remove the work or relocate the work. You state that if the remedy was for damages only, and not included the requirement for your to create artwork to donate (or sell) you would have been paid less. However, the payer in the Statement of Deed does not admit any liability or suggest that your moral rights have been impinged on. When we use the look-through approach, the Statement of Deed provides that you must use the settlement sum for the creation of an artwork that you will then donate (or sell) to a public space, or to create artwork for your artistic practice generally. This is not a payment to you personally, but a payment to you in your capacity and profession as an artist. As was the case in Purvis’ case , although your compensation may have been triggered by a wrong, the actual lump sum payment is not a payment for a wrong or injury you suffered. The settlement sum in your case is to create artwork. There is no evidence to show that the amount was calculated based on a wrong, injury or illness suffered. Further, in this case, payment is not made automatically and you must provide an invoice. You are required to notify the payer of all the details of the artwork. This is not akin to a damages payment – this is payment for production of a sculpture. The “but for” approach - If the event had not occurred the payment for the creation of a piece of work would be seen as ordinary income, not capital. You are an artist. You create works of art as a profession, and are in the business of creating artworks. Therefore this payment is ordinary income and assessable under 6-5 of the ITAA 1997. CGT discounts or exemptions do not apply to ordinary income.