Issue
Is the amount of penalty awarded as part of a settlement for underpayment of wages assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The amount of penalty awarded in the settlement for underpayment of wages is not assessable income under section 6-5 of the ITAA 1997.
Facts
The taxpayer was awarded a lump sum payment by the Federal Court for underpayment of wages.
The Court imposed a penalty under subsection 178(1) of the Workplace Relations Act 1996 (WPRA) upon the taxpayer's employer for breaches of the awards the taxpayer was employed under.
The Court ordered that the penalty amount be paid to the taxpayer pursuant to paragraph 356(b) of the WPRA.
Reasons for Decision
Subsection 6-5(2) of the 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 by the Courts 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.
The payment of penalty was not made as part of the compensation for underpayment of wages. The penalty was imposed on the taxpayer's employer however, the Court had an option as to whom the amount should be paid. The Court decided to follow the usual practice in this type of decision and make the amount payable to the applicant.
The payment was not earned by the taxpayer as it did not directly relate to services performed. The payment did not replace any actual or notional lost income. The payment was a one-off payment and thus did not have an element of recurrence or regularity. The payment was neither expected nor relied upon.
The payment did not have any of the characteristics of ordinary income. The payment was in the nature of a personal windfall or gain and was not related to any income earning activity of the taxpayer.
Accordingly, the penalty amount is not included in the taxpayer's assessable income under section 6-5 of the ITAA 1997.