Private ruling: Compensation payments
Published: February 2012
Ruling period: Year ended 30 June 2011 | Year ending 30 June 2012 | The scheme commenced on | 1 July 2010

Ruling: Q1: Are compensation payments received early in the 2011-12 financial year included as assessable income for the 2010-11 financial year? | A1: No. | Q2: Are compensation payments received early in the 2011-12 financial year included as assessable income for the 2011-12 financial year? | A2: Yes.

Relevant facts and circumstances: You suffered a compensable injury and had time off work. Late in the 2010-11 financial year you were notified that you would receive compensation payments. However, you did not receive the payments until early in the 2011-12 financial year. The payments related to periods in the 2009-10 and 2010-11 financial years.

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

Reasons for decision: Detailed Reasoning - Compensation payments: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes the ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted ( Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; 10 ATD 82) ( Dixon's case ). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts ( Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; (1989) 20 ATR 1516; 89 ATC 5142, Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641, and Case Y47 (1991) 22 ATR 3422; 91 ATC 433). In your case, the compensation payments received after your injury, replaced your salary and wages when you were unable to work. Such payments are therefore regarded as ordinary income and are assessable under subsection 6-5(2) of the ITAA 1997. The fact that payments were made as a lump sum does not alter the character of the payment. Taxation Ruling TR 98/1 sets out the Commissioner's policy on the derivation of income. Paragraph 42 of TR 98/1 states, that income from employment would normally be assessable on a receipts basis. Salary, wages or other employment remuneration are assessable on receipt even though they relate to a past or future income period. Similarly compensation payments paid to an individual are also considered to be derived when the payment is received. In your case, you were advised late in the 2010-11 financial year about your compensation entitlements. However, the payments were not made until early in the 2011-12 financial year. As you received the income in the 2011-12 financial year, this amount is assessable in that year. We acknowledge that you were advised of the payments in the 2010-11 financial year; however, as they were not received during this year, the income is not assessable in that year. It is also acknowledged that the payments relate to periods in the 2009-10 and 2010-11 financial years; however, this does not change the above principle.

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