Private ruling: Assessable income
Date of advice: 16 June 2016
Published: August 2016
Ruling period: Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2015

Ruling: Q1: Are you liable to pay tax on the compensation payment you will receive for unpaid wages? | A1: Yes

Relevant facts and circumstances: You are an Australian resident for tax purposes. You commenced legal action against a former employer for unpaid wages. The settlement was agreed upon with neither party claiming liability and you were awarded a lump sum compensation payment to be paid in monthly instalments. Unpaid wages are still outstanding.

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

Reasons for decision: Summary: You are liable to pay tax on the compensation payment for your unpaid wages. | Detailed Reasoning - Detailed reasoning: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) states that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources whether in or out of Australia, during the income year. Payments of salary and wages are income according to ordinary concepts and are included in assessable income under section 6-5 of the ITAA 1997. 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 AITR 443; 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 (1989) 24 FCR 53; 89 ATC 5142, (1989) 20 ATR 1516). The payment retains the characteristics of ordinary income even though paid as a compensation amount. Furthermore, where the compensation amount is considered to be income under ordinary concepts, it is assessable in the income year it is received for the purposes of section 6-5 of the ITAA 1997, even though the payment may relate to a past or future income period (Taxation Ruling TR 98/1). In your case the compensation amount was for loss of wages in previous income years. Therefore, the compensation amount you will receive for loss of wages is ordinary income and is fully assessable under section 6-5 of the ITAA 1997 in the income year that you receive the payments.