Assessability of an act of grace payment

Is an act of grace payment approved under section 33 of the Financial Management and Accountability Act 1997 (FMAA 1997) assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The act of grace payment approved under section 33 of the FMAA 1997 is not assessable under section 6-5 of the ITAA 1997 as it is not ordinary income.

As a result of information provided by a government department the taxpayer considered that they were eligible and applied for a pension administered by that department.

After a formal consideration of their claim it was decided that they were not in fact eligible.

After a review it was considered that, based on the information provided by the department, it was reasonable for the taxpayer to have concluded that they were eligible for the pension when they were not.

In view of this, an act of grace payment was approved under subsection 33(1) of the FMAA 1997 to redress the situation that resulted from the misleading information which had been provided by the department.

While the payment was calculated by reference to the amount of pension the taxpayer would have received if they had been eligible, it was not paid in substitution of that pension.

The payment was made as a lump sum.

Subsection 6-5(1) of the ITAA 1997 defines assessable income as including income according to ordinary concepts (ordinary income).

There are a number of factors which can assist in determining whether a particular receipt is ordinary income. These include: • whether the payment is the product of any employment, services rendered, or any business ( FC of T v. Harris 80 ATC 4238; (1980) 10 ATR 869) • the quality or character of the payment in the hands of the recipient ( Scott v Federal Commissioner of Taxation (1966) 117 CLR 514; (1966) 10 AITR 367; (1966) 14 ATD 286) • the form of the receipt, that is, whether it is received as a lump sum or periodically ( Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; (1952) 10 ATD 82 ( Dixon's Case )), and • the motive of the person making the payment. Motive, however, is rarely decisive as in many cases a mixture of motives may exist ( Hayes v. Federal Commissioner of Taxation (1956) 96 CLR 47; (1956) 6 AITR 248; (1956) 11 ATD 82).

An act of grace payment under section 33 of the FMAA 1997 is a voluntary payment made by the Commonwealth where there is a moral obligation rather than a legal obligation to do so.

Whether a voluntary payment is assessable income was considered in Dixon's Case .

In holding that the amount was assessable income Dixon CJ and Williams J held that four factors were relevant: • the payments were regular and periodical • the payments arose out of circumstances attending the taxpayer's war service • the payments formed part of the receipts that the taxpayer depended upon for regular expenditure for himself and his dependants, and • the payments were made for that purpose.

In looking at these four factors in the circumstances here it is considered that the payment is not ordinary income as: • it was paid as a lump sum and once and for all • there is no connection between any employment or services rendered by the taxpayer and the payment made • the taxpayer did not rely on the payment for their regular expenditure, and • the payment was not made to cover the taxpayer's regular expenses but to redress the situation which arose due to the department providing misleading information.

Accordingly, the payment is not assessable income under section 6-5 of the ITAA 1997 as it is not ordinary income.