Private ruling: Lump sum - capital vs ordinary income
Date of advice: 20 November 2025
Published: 5 January 2026
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: XX XXXX 20XX

Ruling: Q1: Is the lump sum payment you will receive under the deed of settlement and release assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Will the payment be considered a capital gain? | A2: Yes. | Q3: Are you entitled to the 50% CGT discount on your capital gain? | A3: Yes.

Relevant facts and circumstances: On XX XXXX 20XX, you commenced employment with the Employer. In XXXX 20XX, you obtained legal advice that the arrangement you had with the Employer was unlawful. On XX XXXX 20XX, you ceased employment with the Employer. On XX XXXX 20XX, you commenced proceedings in the Employment Tribunal by making applications pursuant to the Fair Work Act 2009 (Cth) (FW Act) against the Employer. You filed the following claims: • Claim 1 - a 'Money Claim' alleging you were not paid for work carried out for a period. • Claim 2 - a 'pecuniary penalty' application alleging breaches of sections 323 and 45 of the FW Act and making a claim for pecuniary penalties. Your total claims totalled $XX. The Employer denied the allegations. On XX XXXX 20XX, you and the Employer executed a deed of settlement and release (the deed), where both parties agreed without admission of liability to the full and final settlement of all matters. Under subclause XX of the deed, the Employer agreed to: XX Pay you $XX, less a deduction of any PAYG tax required to be deducted as a matter of law, to an account nominated by you. The Employer agreed to make payment in connection with the settlement within XX days of the proper execution of the deed, to the accounts nominated by you. Under the deed, each party released the other from all claims.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 section 102-5 | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 section 104-35 | Income Tax Assessment Act 1997 paragraph 108-5(1)(b)

Reasons for decision: Summary: Accordingly, the compensation payment is not ordinary income and is therefore not assessable under section 6-5 of the ITAA 1997. Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income. Capital gains are included as assessable income under section 102-5 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: 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). An amount paid to compensate for loss generally acquires the character of that for which it is substituted ( Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; (1952) 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts ( Federal Commissioner of Taxation v. Inkster 89 ATC 5142; (1989) 20 ATR 1516 and Tinkler v. Federal Commissioner of Taxation 79 ATC 4641; (1979) 10 ATR 411). Lump sum damages may be a claim made up of several items, some being of a revenue nature and others of a capital nature. If different components of a lump sum compensation payment can be identified, those components that are of an income nature, such as those to compensate for loss of income, are assessable. Taxation Determination TD 93/58 Income tax: under what circumstances is the receipt of a lump sum compensation/settlement payment assessable? outlines the circumstances under which the receipt of a lump sum compensation/settlement payment is assessable as ordinary income. TD 93/58 states that where the compensation payment is for loss of income, the amount is assessable as ordinary income and where a portion of a lump sum payment is identifiable and quantifiable as income, that portion of the payment will be assessable. Based on case law, it can be said that ordinary income generally includes receipts that: • are periodical, regular or recurrent; • are relied upon by the recipient for their regular expenditure and paid to them for that purpose; and • are amounts that are the product in a real sense of any employment of, or services rendered by, the recipient. Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts provides the Commissioner's view on the CGT consequences for recipients of compensation amounts received. TR 95/35 discusses the various scenarios, including: • disposal of the underlying asset, • compensation for permanent damage to, or permanent reduction in value of, the underlying asset, and • disposal of the right to seek compensation. Under the key terms of TR 95/35, the ruling defines the right to seek compensation as: The right to seek compensation is the right of action arising at law or in equity and vesting in the taxpayer on the occurrence of any breach of contract, personal injury or other compensable damage or injury. A right to seek compensation is an asset for the purposes of Part IIIA. The right to seek compensation is acquired at the time of the compensable wrong or injury and includes all of the rights arising during the process of pursuing the compensation claim. The right to seek compensation is disposed of when it is satisfied, surrendered, released or discharged. Paragraph 11 of TR 95/35 states that if the amount of compensation is not received in respect of any underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation. Paragraph 18 of TR 95/35 states that if the amount received is an undissected lump sum, the whole amount is treated as being consideration received on the disposal of the right to seek compensation. Paragraph 112 of TR 95/35 states that while the plaintiff's right to sue is a chose in action and is property, the right is created at the time of the breach of duty or injury giving rise to the cause of action. Paragraph 188 of TR 95/35 states the whether the receipt constitutes income or capital in the hands of the taxpayer depends on the circumstances of the receipt and the reasons why it was paid to the taxpayer. The lump sum that you will receive under the deed is made in agreement without admission of liability to the full and final settlement of all matters. The lump sum is undissected and the revenue parts are unable to be split from the capital parts. 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 compensation payment is not ordinary income and is therefore not assessable under section 6-5 of the ITAA 1997. Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income. Capital gains are included as assessable income under section 102-5 of the ITAA 1997. | Summary: The lump sum will be considered a capital gain. | Detailed Reasoning - Capital gain: Paragraph 108-5(1)(b) of the ITAA 1997 specifically includes a legal or equitable right within the definition of a capital gains tax (CGT) asset. A taxpayer's right to seek compensation is therefore classified as an intangible CGT asset which is acquired at the time of the compensable wrong or injury. Parts 3-1 and 3-3 of the ITAA 1997 contain the capital gains and capital loss provisions commonly referred to as the CGT provisions. When an individual receives a compensation amount, there are CGT consequences. Under section 104-35 of the ITAA 1997, a CGT event D1 happens when the taxpayer suffers the wrong and a right to seek compensation is created. Section 104-25 of the ITAA 1997 provides that CGT event C2 happens on the ending of the right to seek compensation, such as the right to take legal action, when it is satisfied, surrendered, released or discharged. You make a capital gain if the capital proceeds from the ending are more than the asset's cost base. You make a capital loss if those proceeds are less than the asset's reduced cost base. A right to seek compensation is disposed of when the taxpayer agrees to a release, discharge, satisfaction or surrender of his or her right to seek compensation. This is generally at the final point of settlement of the claim and receiving the compensation as outlined at paragraph 158 of TR 95/35. | Summary: You are eligible for the 50% CGT discount on your lump sum you will receive under the deed. | Detailed Reasoning - Detailed reasoning: CGT discount CGT event C2 allows for the CGT 50% discount, you are eligible to apply the discount where you have owned the property for more than 12 months. As stated under paragraph 112 of TR 95/35, your right to sue is a chose in action and is property, the right is created at the time of the breach of duty or injury giving rise to the cause of action. You have owned the property for more than 12 months and are eligible for the 50% discount.