Private ruling: Assessable income
Date of advice: 7 October 2016
Published: December 2016
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is the compensation payment you received considered assessable income? | A1: No. | Q2: Is there a capital gain with the compensation payment you received? | A2: No.

Relevant facts and circumstances: You applied for allowance with a Government Department. This application was denied. You applied for compensation for detriment caused by defective administration with the Government Department. This application was to settle for a compensation payment. You have not received a payment summary from the Government Department. You did not get paid any funds for the allowance.

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

Reasons for decision: Summary: Assessable income Whether a compensation payment is capital or revenue depends on what the compensation payment is intended to replace. Generally, a payment will be on revenue account if it is intended to replace another amount which would have been income. It is therefore necessary to distinguish between compensation for loss of income on the one hand and compensation for the loss of the ability to produce income or the right to receive income on the other. In your situation, the payment that you received was not intended to replace another amount which would have been income. It was compensation for a wrong that you suffered in your negative interactions with the Government Department. Capital gains Additionally, paragraph 118-37(1)(a)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997) needs to be considered as this operates to disregard a capital gain or capital loss from a capital gains tax (CGT) event which relates directly to compensation or damages received for any wrong or injury suffered by a person personally. Accordingly, in your case, the compensation received by you was for a wrong suffered by you in your interactions with the Government Department. The 'wrong' suffered for the purposes of paragraphs 118-37(1)(a) or (b) of the ITAA 1997 is the loss that you have suffered and therefore, the lump sum payment is exempt from CGT. In conclusion, the lump sum payment received by you for the detriment caused by defective administration is not assessable, either as ordinary income or under the CGT provisions.