Private ruling: Compensation payment – Defective administration
Date of advice: 28 February 2018
Published: June 2018
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is a compensation payment received because of defective administration assessable income? | A1: Yes.

Relevant facts and circumstances: You are an Australian resident. You are employed by #. On # you lodged a claim for compensation under the Compensation for Detriment due to Defective Administration Scheme. The claim was for an amount equivalent to that which you would have received as a retention benefit. Your claim was approved. You were paid $X representing the amount of retention benefit that you might otherwise have been paid.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(2) | Income Tax Assessment Act 1936 section 159ZRA

Reasons for decision: Summary: 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. An amount paid to compensate for loss generally acquires the character of that for which it is substituted. Taxation Determination TD 93/58 explains that lump sum compensation is assessable income to the extent that it is identifiable and quantifiable as income. This will be possible where the parties either expressly or impliedly agree that a payment relates to a loss of an income nature. In your case, you received a defective administration compensation payment from your employer because of a defect in the administration of your service which left you ineligible to receive a retention benefit. The compensation payment of $ is based on the amount of retention benefit you might otherwise have been paid. The compensation payment has the character of assessable income because it replaces income from this source. Therefore, the lump sum compensation payment you received for defective administration, is assessable income under section 6-5(2) of the ITAA 1997 and must be included as such in your tax return in the 20XX-XX year, being the year of receipt.