ATO Interpretative Decision

ATO ID 2002/323

Income Tax

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

Issue

Can the taxpayer claim a deduction for fees levied by the Office of the Protective Commissioner in respect of a personal injury payment received under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. The taxpayer cannot claim a deduction for fees levied by the Office of the Protective Commissioner in respect of a personal injury payment received under section 8-1 of the ITAA 1997, as the fees do not relate to the earning or deriving of assessable income.

Facts

The taxpayer received a personal injury payment as compensation for severe disabilities caused by a motor vehicle accident.

The New South Wales Office of the Protective Commissioner levied fees on the payment in accordance with the powers granted under the Protected Estates Act 1983.

Reasons for Decision

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining and producing assessable income, except where the outgoings are of a capital, private or domestic nature.

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:

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Are earned

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Are expected

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Are relied upon; and

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Have an element of periodicity, recurrence or regularity.

The personal injury payment is not earned by the taxpayer as it does not directly relate to services performed. Rather the payment relates to personal circumstances that have arisen during the taxpayer's life. 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 right to compensation rather than from a relationship where personal services are performed. Thus, the personal injury payment is not considered ordinary income and is therefore not assessable under subsection 6-5(2) of the ITAA 1997.

Taxation Ruling TR 95/35 indicates that the settlement of a personal injuries claim represents the disposal of an asset, as the taxpayer has disposed of the right to seek compensation for losses arising from the injury suffered.

Paragraph 118-37(1)(b) of the ITAA 1997 disregards the payment or receipts where the amount relates to compensation or damages a taxpayer receives for any wrong, injury or illness a taxpayer has suffered. Thus the amount is not considered statutory income under section 6-10 of the ITAA 1997 and is not assessable income under that provision.

Subsection 6-15(1) of the ITAA 1997 provides the amount is not taxable as the amount is not ordinary income under section 6-5 of the ITAA 1997 or statutory income under 6-10 of the ITAA 1997.

The fees are directly related to an amount which is not assessable income. The fees have not been incurred in gaining or producing assessable income. Accordingly, the taxpayer cannot claim a deduction for the fees under section 8-1 of the ITAA 1997.

Legislative References:
Income Tax Assessment Act 1997
   section 6-5
   subsection 6-5(2)
   section 6-10
   subsection 6-15(1)
   section 8-1
   paragraph 118-37(1)(b)

Related Public Rulings (including Determinations)
TR 95/35

Keywords
Deductions
Lump sum payments
Capital gains tax
Compensation income
damages

Business Line:  Small Business/Individual Taxpayers

Date of publication:  28 March 2002

ISSN: 1445-2782