Private ruling: Compensation payment - Defective administration
Date of advice: 28 November 2016
Published: April 2017
Ruling period: Year ended 30 June 20ZZ
Date scheme commenced: 1 July 20YY

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

Relevant facts and circumstances: In 20XX you started your Leave application process by lodging your form electronically with the relevant Agency. You gave birth in 20YY and were expecting your Leave entitlement in 20XX-YY financial year. You did not receive it then and then fought for it with the relevant Department and won your entitlement via a specific scheme for Compensation. You received the compensation payment at the end of June 20ZZ. You have attached the related application and a copy of proof of receiving the settlement.

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

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 compensation payment from the relevant Department because of unpaid leave due to you. The compensation payment was based on your lost leave entitlements. The payment helped compensate you for the loss of income you suffered. The leave entitlements would have been assessable income had you received them during this period. Therefore, the compensation payment acquires the character of assessable income because it replaces income from this source. As a result, the lump sum compensation payment you received is assessable income under section 6-5(2) of the ITAA 1997 and must be included as such in your tax return in the 20YY-ZZ year, being the year of receipt.