ATO Interpretative Decision
ATO ID 2002/473 (Withdrawn)
Income Tax
Assessability of pre-judgment interestFOI status: may be released
-
This ATO ID is withdrawn and replaced by ATO ID 2010/213.This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is pre-judgment interest received as part of a lump sum compensation payment for personal injury, assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The pre-judgment interest received as part of a lump sum compensation payment for personal injury is not assessable under section 6-5 of the ITAA 1997 as the amount is a capital receipt.
Facts
The taxpayer was awarded a lump sum payment for personal injuries sustained in a work related accident.
The payment included an amount of pre-judgement interest.
Reasons for Decision
Section 6-5 of the ITAA 1997 provides that the taxpayer's assessable income includes income according to ordinary concepts which is called ordinary income.
Interest income is normally regarded as ordinary income for the purposes of section 6-5 of the ITAA 1997.
Lump sum damages awarded at common law for a personal injury claim often include amounts of pre-judgment or post-judgment interest.
Pre-judgment interest is calculated from the date the cause of action (eg the accident) occurred and the date the judgment is made.
Post-judgment interest is calculated on the amount of the judgment debt from the date of final judgment to the date the debt is paid.
Post-judgment interest relating to personal injury damages is specifically made exempt from income tax by section 23GA of the Income Tax Assessment Act 1936 (for amounts received during the 1992-93 year of income and up to and including the 1996-97 year of income) and section 51-57 of the ITAA 1997 (for 1997-8 and later years of income).
Pre-judgment interest was considered by the Full Federal Court in Whitaker v. Federal Commissioner of Taxation (1998) 153 ALR 334; 98 ATC 4285. The court decided that pre-judgment interest did not have the character of income but was a receipt of a capital nature. The primary purpose of the interest was to compensate the plaintiff for the loss or detriment they had suffered by not having access to their money during the relevant period. It was compensation for having been deprived of the use of the money and not for forgone investment opportunity. It did not replace any actual or notional lost income.
The amount of pre-judgment interest is therefore a capital receipt and is not assessable under section 6-5 of the ITAA 1997.
Date of decision: 27 February 2002Year of income: Year ended 30 June 1997
Legislative References:
Income Tax Assessment Act 1936
section 23GA.
section 6-5
section 51-57
Case References:
Whitaker v. Federal Commissioner of Taxation
(1998) 153 ALR 334
98 ATC 4285
38 ATR 219
Keywords
Compensation income
Damages income
Interest income
Personal injury awards
Workers compensation income
ISSN: 1445-2782
| Date: | Version: | |
| 27 February 2002 | Original statement | |
| You are here | 26 November 2010 | Archived |