Private ruling: Ex-gratia payment
Published: October 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you assessable on the ex-gratia payment you received? | A1: No. | Q2: Will any capital gains arising from the compensation payment be disregarded? | A2: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(2) | Income Tax Assessment Act 1997 Paragraph 118-37(1)(b)

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. Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that: · are earned · are expected · are relied upon, and · have an element of periodicity, recurrence or regularity. In your case, the ex-gratia payment you have received was not from rendering personal services, income from property or income from carrying on a business. Although the payment may have been expected and relied upon, it was not earned and was received in a lump sum. Therefore, the ex-gratia payment you have received is not assessable as ordinary income. | Detailed Reasoning - Capital gains tax (CGT): Amounts received in respect of personal injury which are not direct compensation for loss of income will usually be capital in nature and are potentially taxable as statutory income under the CGT provisions of the ITAA 1997. Taxation Ruling TR 95/35 deals with the capital gains treatment of compensation receipts. The ruling advocates a 'look-through' approach, which identifies the most relevant asset to which the compensation amount is most directly related. Paragraph 11 of TR 95/35 states that if an amount is not received in respect of an underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation. However, paragraph 118-37(1)(b) of the ITAA 1997 disregards a capital gain made from a CGT where the amount relates to compensation or damages received for any 'wrong, injury or illness you suffer personally'. Therefore, any capital gain that may arise from the receipt of the lump sum payment for the wrong you suffered will be disregarded.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: You had a dispute with your manager at work and took the matter to Fair Work Australia. | As a result, your employer was ordered to: | · Pay you all accrued and unused leave | · Pay you all outstanding salary | · A payment in lieu of notice | · Give you a statement of service stating your classification and period of service.