ATO Interpretative Decision

ATO ID 2002/423 (Withdrawn)

Income Tax

• This ATO ID is superseded by ATO ID 2004/944.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is an amount received by the taxpayer as compensation for pain, suffering and medical expenses as a result of personal wrong, injury or illness assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) or as statutory income under section 6-10 of the ITAA 1997?

Decision

No. An amount received by the taxpayer, as compensation for pain, suffering and medical expenses as a result of personal wrong, injury or illness is not assessable as ordinary income under section 6-5 of the ITAA 1997 or as statutory income under section 6-10 of the ITAA 1997.

Facts

The taxpayer received a lump sum payment for a personal injury which was not related to the taxpayer's employment.

The payment was to cover the taxpayer's pain, suffering and the costs of medical treatment.

Reasons for Decision

Section 6-5 of the ITAA 1997 provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income).

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 includes receipts that:

•

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 lump sum the taxpayer received was not earned by the taxpayer as it does not relate to services performed. The payment is also a one off payment and thus it 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 pain, suffering and medical treatment required resulting from the injury, rather than from a relationship to personal services performed.

Accordingly, the lump sum payment is not ordinary income and is therefore not assessable under section 6-5 of the ITAA 1997.

Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision.

Section 10-5 of the ITAA 1997 lists those provisions about assessable income. Included in this list are section 15-30 of the ITAA 1997 which deals with insurance recoveries and section 102-5 of the ITAA 1997 which deals with capital gains.

Section 15-30 of the ITAA 1997 operates to include in a taxpayer's assessable income any amount received by way of insurance or indemnity for the loss of an amount if the lost amount would have been included in the taxpayer's assessable income but was not assessable under section 6-5 of the ITAA 1997.

The compensation amount paid to the taxpayer would not have been included in the taxpayer's assessable income and therefore section 15-30 of the ITAA 1997 will have no application.

Compensation resulting from personal injury represents a disposal of an asset for capital gains tax (CGT) purposes. The disposal of an asset gives rise to a CGT event. However, paragraph 118-37(1)(b) of the ITAA 1997 disregards payments or receipts for the purposes of CGT where the amount relates to compensation or damages a taxpayer received for any personal wrong, injury or illness.

The compensation amount received by the taxpayer was for a personal wrong, injury or illness which did not arise out of their occupation. Therefore paragraph 118-37(1) (b) of the ITAA 1997 applies so that any capital gain or capital loss the taxpayer made will be disregarded for the purposes of CGT.

Accordingly, the lump sum payment received by the taxpayer for pain, suffering and medical expenses is not assessable under either section 6-5 or section 6-10 of the ITAA 1997.

Legislative References:
Income Tax Assessment Act 1997
   section 6-5
   section 6-10
   section 10-5
   section 15-30
   section 102-5
   paragraph 118-37(1)(b)

Keywords
Capital gains tax
Compensation income
Personal injury awards

Business Line:  Small Business/Individual Taxpayers

Date of publication:  12 April 2002

ISSN: 1445-2782