Private ruling: Assessability of lump sum compensation payment
Date of advice: 13 July 2018
Published: September 2018
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q2: Is the payment you received assessable as statutory income? Answer: No.

Relevant facts and circumstances: You submitted an application with the Fair Work Commission. Your original fulltime employment with Company X commenced in excess of 20 years ago. After working with Company X in excess of 15 years the company changed its name and you were asked to become a contractor. After contracting work dried up you were asked to go permanent part-time. You were then requested to commence a contracting role again. You were seeking compensation for a sham arrangement whereby you were put into a contracting position by promising work and not following through on that promise. Your hours of work have decreased dramatically from previous years. You claimed for loss of work based on the previous year’s arrangement. You suffered the inconvenience of having to apply for and seek alternate work opportunities after waiting for a period of weeks not knowing if any work would be given as promised. You suffered increased stress levels, weight gain and high blood pressure after trying to find wages to support your home loans and family. The matter was heard and finalised by the Fair Work Commission and you were paid a lump sum Company X. There was no documentation in relation to the payment as it was a confidential matter as agreed before the tribunal. The tribunal commissioner advised you that if the payment was not made then you could pursue the matter by further legal action in the Relevant Court. Upon settlement satisfaction you were required to complete a notice of discontinuance form and you received an email in response to confirm that matter was finalised.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Section 10-5 | Income Tax Assessment Act 1997 Section 104-25

Reasons for decision: Detailed Reasoning - Ordinary income: Tax legislation refers to ordinary income as income 'according to ordinary concepts'. This phrase is not defined under the legislation, but a large body of case law has developed to identify the factors that indicate if an amount is income according to ordinary concepts. Typical examples of ordinary income include salaries, wages, and proceeds of carrying on a business, rent, interest and dividends. Typical examples of items which are not generally ordinary income include lottery prizes, proceeds from a hobby, loans and gifts. A lump sum payment can be classed as ordinary income if it has been paid in compensation or settlement for lost salary or wages. The Commissioner’s view on the taxation treatment of a lump sum settlement payment is clarified in Taxation Determination: TD 93/58 Income tax: under what circumstances is the receipt of a lump sum compensation/settlement payment assessable ? TD 93/58 states that if a payment is compensation for loss of income only, including interest, then it is assessable income. In AAT Case Allman and FCT (1998) 39 ATR 1081, a pilot's employment was terminated when he turned 60. The Industrial Relations Court ordered his former employer to reinstate him and to pay $169,000 as ‘remuneration lost because of the termination’. The AAT found that the payment was assessable as ordinary income because it was in substitution for the income the taxpayer would have earned, rather than being for loss of earning capacity. The taxpayer also unsuccessfully argued that the payment was a termination payment (because the payment was made in consequence of the reinstatement, not termination, of employment). | Detailed Reasoning - Statutory income: Payments that are capital in nature may be assessable as statutory income under the capital gains tax (CGT) provisions. Your assessable income includes any net capital gains for an income year. In Taxation Ruling TR 95/35: Income tax: capital gains: treatment of compensation receipts , the Commissioner states that whether a lump sum or other compensation payment is assessable in the hands of the recipient depends on whether it is a receipt of a capital or income nature. This in turn depends upon consideration of all the circumstances surrounding the payment. It is the character of the receipt in the hands of the recipient that must be determined. A CGT event C2 happens if a taxpayer's ownership of an intangible CGT asset ends because the asset expires or is redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered or forfeited. A settlement or compensation payment may be paid as a result of giving up your right to seek compensation and this right is an intangible CGT asset. However, in TR 95/35 the Commissioner adopts a ‘look-through’ or ‘underlying asset’ approach to determine the asset that has been disposed of. The ‘look-through’ approach is the process of identifying the most relevant asset. It requires an analysis of all of the possible assets of the taxpayer in order to determine the asset to which the compensation amount is most directly related. | Detailed Reasoning - Application to your circumstances: The issue to be determined is the character of the lump sum payment in your hands. ● You had been working as an employee with company X in excess of 15 years when you were asked to become a contractor. ● After contracting work dried up you were asked to go permanent part-time. ● You were then requested to commence a contracting role again. ● You were seeking compensation for a sham arrangement whereby you were put into a contracting position by promising work and not following through on that promise. ● You claimed 19 weeks loss of work based on the previous year’s arrangement. ● The matter was heard and finalised by the Fair Work Commission and you were paid a lump sum by Company X. ● There was no documentation in relation to the payment as it was a confidential matter as agreed before the tribunal. ● Upon settlement satisfaction you were required to complete a notice of discontinuance form and you received an email in response to confirm that matter was finalised. Having no documentation which identifies the nature of the payment, the ‘look-through’ approach leads us to the conclusion that the payment you received was to compensate you for lost income. Such a payment is assessable as ordinary income.

Question 1: Is the payment you received assessable as ordinary income?