ATO Interpretative Decision

ATO ID 2004/943

Income tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is a lump sum payment received by a taxpayer for permanent injury occurring at work, assessable under section 6-5 or section 102-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. A lump sum payment received by the taxpayer for permanent injury occurring at work is not assessable under section 6-5 of the ITAA 1997 as it is not ordinary income. Nor is it assessable under section 102-5 of the ITAA 1997 as paragraph 118-37(1)(a) of the ITAA 1997 disregards a capital gain made from a capital gains tax (CGT) event where the amount received relates to compensation or damages received for any 'wrong or injury you suffer in your occupation'

Facts

The taxpayer was injured at work.

The taxpayer received a lump sum payment in respect of permanent impairment from injury.

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 to include 3 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

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are relied upon, and

•

have an element of periodicity, recurrence or regularity.

The lump sum payment is not earned by the taxpayer as it does not directly relate to services performed. Rather the lump sum relates to the loss of physical abilities. The payment is also a one-off payment and thus does not have an element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation arises from the investment in insurance, rather than from a relationship with personal services performed. Thus, the lump sum payment is not ordinary income and is therefore not assessable under subsection 6-5(2) of the ITAA 1997.

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income and are also included in assessable income.

Amounts received in respect of personal injury which is not for reimbursement of medical expenses, or direct compensation for loss of income will usually be capital in nature and are potentially taxable as statutory income under the capital gains tax 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.

As the amount received by the taxpayer is not in respect of any underlying asset, the whole of the settlement amount is treated as capital proceeds from a CGT event (CGT event C2) happening to the taxpayer's right to seek compensation.

However, paragraph 118-37(1)(a) of the ITAA 1997 disregards a capital gain made from a CGT event where the amount relates to compensation or damages received for any 'wrong, injury or illness you ... suffer in your occupation'. Therefore, any capital gain made from the CGT event happening to the taxpayer's right to seek compensation is disregarded under paragraph 118-37(1)(a) of the ITAA 1997. It is thus not statutory income.

Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary or statutory income it is not assessable income. Consequently no part of the amount received is included in the taxpayer's assessable income.

Year of income:  30 June 2005

Legislative References:
Income Tax Assessment Act 1997
   section 6-5(2)
   subsection 6-15(1)
   section 6-20
   section 102-5
   paragraph 118-37(1)(a)

Related Public Rulings (including Determinations)
Taxation Ruling TR 95/35

Keywords
Capital gains tax
Lump sum payments
Compensation income

Business Line:  Small Business/Individual Taxpayers

Date of publication:  26 November 2004

ISSN: 1445-2782