Private ruling: Assessability of compensation
Published: May 2014
Ruling period: 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will a payment for damages resulting from a settlement be assessable to you? | A1: No

Relevant facts and circumstances: You have provided a copy of the deed. You claimed an unpaid superannuation from your employer. You alleged that you received incorrect advice regarding your eligibility to join a superannuation fund. You have reached a settlement agreement to the sum of $X for damages (including interest) and nothing for legal costs and expenses. In the deed it states that in 200X, you notified your employer of your potential superannuation claim. In the deed it states that you alleged that you received incorrect advice regarding your eligibility to join superannuation fund prior to 1985.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(1) | Income Tax Assessment Act 1997 Subsection 15-2(1) | Income Tax Assessment Act 1997 Section 82-130 | Income Tax Assessment Act 1997 Section 118-305

Reasons for decision: Summary: You are not assessable of the compensation you have received as the original cause of action arose prior 19 September 1985. | Detailed Reasoning - Ordinary income: Under subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) an amount is assessable income if it is income according to ordinary concepts (ordinary income). In determining whether an amount is ordinary income, the courts have established the following principles' • what receipts ought to be treated as income must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as a statute dictates otherwise, • whether the payment received is income depends upon a close examination of all relevant circumstances, and • whether the payment received is income is an objective test. Relevant factors in determining whether an amount is ordinary income include: • whether the payment is the product of any employment, services rendered, or any business; • the quality or character of the payment in the hands of the recipient; • the form of the receipt, that is, whether it is received as a lump sum or periodically and; • the motive of the person making the payment Motive, however, is rarely decisive as in many cases a mixture of motives may exist. When considering the settlement payments the most relevant factors include whether the payment is the product of any employment or services rendered and the quality or character of the payment in the hands of the recipient, for example, whether it's capital in nature or is a supplement to an existing income stream. We note that the background to the payments is a claim of negligence in respect of a lost capacity to acquire superannuation benefits. It is the nature of superannuation benefits that they may ultimately be paid out in different circumstances and may have components subject to different taxation treatment, including a non-taxable component. We accept that in the circumstances described the payment of an un-dissected lump sum payment receipt is capital in nature and not ordinary income. | Detailed Reasoning - Statutory income: Benefit in respect of employment Subsection 15-2(1) of the ITAA 1997 provides that assessable income includes: …the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you … In the John Griffith Cornwell v The Commonwealth of Australia (2005) ACTSC 14 the Cornwell decision the High Court accepted Mr Cornwell's submission that the compensable entitlement arose under a federal statute concerning superannuation benefits and was crystallised upon retirement. Further, we note that the cause of action arose under the tort of negligence and not in respect of the employment contract. Accordingly, in similar circumstances our view is that a lump sum payment receipt is not a benefit in respect of employment. Employment Termination Payment For a payment to be considered an employment termination payment pursuant to section 82-130 of the ITAA 1997 it must be paid 'in consequence of termination of employment Taxation Ruling TR 2003/13 Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of' provides the Tax Office view on the meaning of this phrase which has also been interpreted by the courts in several cases. The Commissioner considers that a payment is made in consequence of termination of employment if it 'follows as an effect or result of' the termination. Furthermore, the termination does not need to be the dominant cause of the payment but it must be a sufficient cause for the payment. While termination can include retirement, our view is that a lump sum compensation receipt received in circumstances similar to those of Cornwell is not an employment termination payment. We note that the payment can be said to have flowed from the retirement of a claimant as the retirement of the claimant is a necessary prerequisite for receiving the payment. However, this is one of a number of pre-requisites required in establishing a successful negligence claim. Other important pre-requisites include the proof of a duty of care owed and breach of that duty. In the circumstances we accept that the termination is not a sufficient cause of the payment. While the payment may be made at or about the time the employee retired, our view is that their retirement is not a sufficient cause for the payment. Capital Gains Tax There may be capital gains tax consequences for the claimants, depending on their particular circumstances, and on how the settlement amount is determined and paid. Section 118-305 of the ITAA 97 provides for a capital gain to be disregarded if it is made in relation to certain rights associated with superannuation. Specifically, a capital gain may be disregarded if it relates to a right to an amount payable out of a superannuation fund. Providing the lump sum payment relates wholly to the interest of the claimant in a superannuation fund, there will be no capital gain or loss arising. Otherwise the payment may be subject to capital gains tax, providing that the original cause of action (the negligent advice in cases similar to those of Cornwell ) arose after 20 September 1985. Generally CGT events provide exceptions which disregard a capital gain or loss made on an asset acquired before 20 September 1985. In your case, the original cause of action arose prior to 1985 when you received incorrect advice regarding your eligibility to join a superannuation fund. As such an intangible CGT asset was acquired prior to 20 September 1985, and any resulting CGT gain or loss will be disregarded in relation to your CGT asset, that is the ending of your right to a cause of action against the commonwealth for incorrect advice.