Private ruling: Assesability of compensation payment
Published: May 2015
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: 1. Is the compensation payment a superannuation benefit under section 301-5 of the Income Tax Assessment Act 1997 ? 2. Is the lump sum compensation payment received by you assessable income? 3. Will any capital gain arising from the compensation be disregarded? Advice/Answers 1. No. 2. No 3. Yes

Relevant facts and circumstances: You commenced employment on date earlier than recorded by your employer. Consequently, you received a settlement from your former employer regarding any potential future claims as to unpaid superannuation. This settlement offer was calculated on the basis that you obtained permanent employment with your employer on the earlier date than that they recorded. At the time of receiving the compensation amount you were no longer contributing to the relevant superannuation fund and you had accessed the retirement benefits. Therefore the payment could not be backdated and paid into the fund, and you were paid a settlement sum to compensate for loss of employer funded benefit.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 307-5. | Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Paragraph 104-25(1)(a) | Income Tax Assessment Act 1997 Paragraph 104-25(5)(a) | Income Tax Assessment Act 1997 Subsection 109-5(1)

Reasons for decision: Summary: Subsection 307-5 (1) of the ITAA 1997 defines a superannuation benefit as a payment described in the following table. | Detailed Reasoning - Column 3 Superannuation death benefit: 1 | Detailed Reasoning - superannuation fund payment: A payment to you from a *superannuation fund because you are a fund member. A payment to you from a superannuation fund, after another person's death, because the other person was a fund member. 2 | Detailed Reasoning - RSA payment: A payment to you from an *RSA because you are the holder of the RSA. A payment to you from an RSA, after another person's death, because the other person was the holder of the RSA. 3 | Detailed Reasoning - approved deposit fund payment: A payment to you from an *approved deposit fund because you are a depositor with the fund. A payment to you from an approved deposit fund after another person's death, because the other person was a depositor with the fund. 4 | Detailed Reasoning - small superannuation account payment: A payment to you under section 63, 64, 65, 66, 67 or 67A, or subsection 76(6), of the Small Superannuation Accounts Act 1995 . (These provisions authorise payment of money held under the Act.) A payment to you under section 68 or subsection 76(7) of the Small Superannuation Accounts Act 1995 . (These provisions authorise payment of money held under the Act to the legal personal representative of the deceased.) 5 | Detailed Reasoning - unclaimed money payment: A payment to you: (a) under subsection 17(1), (2) or (2AB) , 20F(1) or 20H(2), (2AA) or (2A), section 24E or subsection 24G(2) or (3A) of the Superannuation (Unclaimed Money and Lost Members) Act 1999 ; or (b) as mentioned in subsection 18(4) or (5) of that Act; otherwise than because of another person's death . A payment to you: (a) under subsection 17(1), (2), (2AB) or (2AC), 20H(2), (2AA), (2A) or (3) or 24G(2), (3A) or (3B) of the Superannuation (Unclaimed Money and Lost Members) Act 1999 ; or (b) as mentioned in subsection 18(4) or (5) of that Act; because of another person's death. 6 | Detailed Reasoning - superannuation co-contribution benefit payment: A payment to you under paragraph 15(1)(c) of the Superannuation (Government Co-contribution for Low Income Earners) Act 2003 . A payment to you under paragraph 15(1)(d) of the Superannuation (Government Co-contribution for Low Income Earners) Act 2003 . 7 | Detailed Reasoning - superannuation guarantee payment: A payment to you under section 65A or 66 of the Superannuation Guarantee (Administration) Act 1992 . (This provides for money collected under the Act to be paid to a person who retires because of incapacity or invalidity.) A payment to you under section 67 of the Superannuation Guarantee (Administration) Act 1992 . (This provides for money collected under the Act to be paid to the legal personal representative of the deceased.) 8 | Detailed Reasoning - superannuation annuity payment: A payment to you: (a) from a *superannuation annuity; or (b) arising from the commutation of a superannuation annuity; because you are the annuitant. A payment to you: (a) from a superannuation annuity; or (b) arising from the commutation of a superannuation annuity; because of the death of the annuitant. Subsection 307-5 (2) of the ITAA 1997 defines a superannuation member benefit as a payment described in column 2 of the table. Subsection 307-5 (3) of the ITAA 1997 states that a superannuation benefit is also a superannuation member benefit if: (a) the superannuation benefit arises from the commutation of a * superannuation income stream; and (b) it would be a * superannuation death benefit apart from this subsection; and (c) the benefit is paid after the latest of the following: (i) 6 months after the death of the deceased person; (ii) 3 months after the grant of probate of that deceased person's will or letters of administration of that deceased person's estate; (iii) if the payment of the benefit is delayed because of legal action about entitlement to the benefit--6 months after the legal action ceases; (iv) if the payment of the benefit is delayed because of reasonable delays in the process of identifying and making initial contact with potential recipients of the benefit--6 months after that process is completed; and (d) the Commissioner has not made a decision about the benefit under subsection (3A). Therefore, as subsections 307-5 (1), (2), or (3) of the ITAA 1997 have not been satisfied, the payment is not considered to be a superannuation benefit. | Detailed Reasoning - Assessable income for the purposes of ordinary income?: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year unless the payment is capital in nature. Whether the proceeds of a compensation payment are 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 the income on the other. A payment will be compensation for a loss in earning capacity where the taxpayer has a reduced capacity to earn income and the payment is made in respect of that loss. A payment will be compensation for a loss in income where the taxpayer has suffered a loss in earning capacity, either temporary or permanent, but the compensation is paid in respect of the loss of income only ( Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; 89 ATC 5142, 1989 20 ATR 1516). From the information you have provided we have concluded that the payment was compensation for incorrect advice which resulted in the loss of the capacity to earn income in the form of superannuation benefits. As the capacity to earn income is considered to be a capital asset the payment is considered to be capital in nature and thus not assessable under section 6-5 of the ITAA 1997. | Detailed Reasoning - Capital gains tax: Section 6-10 of the ITAA 1997 provides that amounts other than ordinary income are included in your assessable income where those amounts are treated as assessable income by other provisions of the income tax law. Section 102-5 of the ITAA 1997 provides that capital gains are included in assessable income. Therefore, any net capital gain that you make is included in your assessable income in the year of income that the gain is made, unless it is covered by one of the exemptions. Paragraph 104-25(1)(a) of the ITAA 1997 provides that CGT event C2 happens if a taxpayers ownership of an intangible CGT asset ends because it is redeemed or cancelled. The relevant CGT asset in your case is your right to seek damages for the incorrect advice. When the Deed of Release was executed with your employer your right to seek damages were cancelled or terminated, CGT event C2 relating to cancellation, surrender and similar endings, happened to your right to seek damages. | Detailed Reasoning - Was an asset acquired before 20 September 1985?: Paragraph 104-25(5)(a) of the ITAA 1997 provides that a capital gain or capital loss you make is disregarded if you acquired the asset before 20 September 1985. Under subsection 109-5(1) of the ITAA 1997, a taxpayer generally acquires a CGT asset when they become its owner. You acquired the right to seek damages at the time you received the incorrect advice. As this advice was provided prior to 20 September 1985 the capital gain is disregarded.