Private ruling: Derivation of income
Published: December 2013
Ruling period: Year ended 30 March 20XX.
Date scheme commenced: The scheme commenced on entry into the settlement agreement.

Ruling: Q1: Does the lump sum received by the taxpayer on settlement of the Court proceedings, represent a capital gain pursuant to section 102-20 of the ITAA 1997, as a CGT event pursuant to section 102-5 of the Act, being a payment received for relinquishing a right to sue the payer, and therefore is statutory income pursuant to section 6-10 of the ITAA 1997, derived and assessable on the date of settlement, and therefore included in the taxpayer's income tax return for the relevant year? | A1: No. | Q2: Alternatively, if the amount received is not considered to be a capital gain pursuant to section 102-20 of the Act, is this amount assessable income pursuant to section 6-5 of the ITAA 1997 and if so is this amount derived at the date of settlement and therefore should be included in the taxpayer's income tax return for the relevant year? | A2: Yes. The amount received is assessable income, under section 6-5 of the ITAA 1997, of the relevant income year.

Relevant facts and circumstances: You have a substituted accounting period that ends on a specific date in lieu of the following 30 June. A joint venture in which you were a participant brought a number of cross claims in an action involving a third party. Judgement was delivered in favour of the joint venture. The third party filed an appeal. You entered into a Settlement deed whereby the third party resolved and agreed to pay the joint venture an amount in full settlement of all claims made by the joint venture against them. The undissected lump sum is made up entirely of income components. Your share of the amount was paid to you during the relevant income year. Pursuant to your auditors advice that paragraph 3 of AASB 110 applied in regard to the receipt of this money this amount has been included in your financial statements for the relevant year ended as an adjusting event after the end of the reporting period.

Relevant legislative provisions: Section 6-5 Income Tax Assessment Act 1997 | Section 102-5 Income Tax Assessment Act 1997

Reasons for decision: Summary: The amount received is not the proceeds from the disposal of the right to seek compensation. | Detailed Reasoning - Detailed reasoning: You have contended that as the lump sum received can not be apportioned on a reasonable basis amongst the various income heads of claim paragraph 204 of Taxation Ruling 95/35 provides that the whole amount of compensation relates to the disposal of the right to seek compensation. The context within which paragraph 204 is set is one where no dissection is possible between capital and income elements. In that context where the compensation is unable to be allocated on a reasonable basis the whole amount of compensation must relate to the disposal of the right to seek compensation. Where as in your case the total amount of compensation is income and there is no capital component, paragraph 204 does not apply. | Summary: The amount received is assessable income of the relevant income year. | Detailed Reasoning - Detailed reasoning: Subsection 6-5(2) of the ITAA 1997 includes in the assessable income of a resident taxpayer the ordinary income they derived directly or indirectly from all sources, whether in or out of Australia, during the income year.' Taxation Ruling TR 98/1: determination of income; receipts versus earnings states in paragraph 20 that 'The earnings method is, in most cases, appropriate to determine business income derived from a trading or manufacturing business.' In respect of the earnings method it states, 9….Under the earnings method, income is derived when it is earned. The point of derivation occurs when a 'recoverable debt' is created. 10. The term 'recoverable debt' is used to describe the point of time at which a taxpayer is legally entitled to an ascertainable amount as the result of having performed an agreed task. A taxpayer may have a recoverable debt even though, at the time, they cannot legally enforce recovery of the debt. 11. Whether there is, in law, a recoverable debt is a question to be determined by reference to the contractual agreements that give rise to the legal entitlement to payment, the general law and any relevant statutory provisions. As the amount is an undissected lump sum it is considered that a recoverable debt arises in respect of the whole amount when the deed of settlement is entered into. Thus the amount is assessable income of the relevant year ended.