Edited version of private ruling

Authorisation Number: 1011516232091

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Ruling

Subject: Compensation - Ex-gratia Payment

Question

Is the amount you received as compensation for pain and suffering, and medical expenses included in your assessable income?

No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You commenced employment with your employer in the relevant year.

You suffered an injury in the course of your employment with the employer.

You will receive a lump sum payment from your employer.

The amount is an ex gratia payment for pain and suffering, and medical expenses.

You did not have any time off work but have incurred medical expenses for the injury.

You lodged a workers' compensation claim with the employer. The employer rejected the claim on the grounds that you had an underlying condition.

You subsequently commenced proceedings with the relevant Workers Compensation Tribunal (the Tribunal).

With the consent of the parties, the Tribunal made the following orders:

· the decision of the compensating authority, which rejected liability for a disability which was the subject of a Claim for Compensation , is confirmed.

· worker is not entitled to costs of the proceedings.

The worker is entitled to the following disbursements:

· report by Dr Q .

· report by Dr R .

· agreement to be noted:

The parties agree as to the following:

· the compensating authority will pay the worker a sum on an ex gratia basis for pain and suffering and medical expenses and with no acceptance of liability.

· the worker has suffered no economic loss.

· the worker will resign effective in .the particular month.

· the worker will not seek re-employment with the compensating authority or the employer at any time in the future;

· on acceptance of these terms and the above Order, the worker will not be required to attend work but will be paid her weekly wages until her resignation in the particular year; and

· on her resignation, the worker will be paid her accrued statutory entitlements calculated as at Month 2010.

· your employment was terminated as of the particular date.

· you have supplied medical reports in respect of your illness.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 6-10.

Income Tax Assessment Act 1997 Section 10-5.

Income Tax Assessment Act 1997 Section 15-30.

Income Tax Assessment Act 1997 Section 102-5.

Income Tax Assessment Act 1997 Paragraph 118-37(1)(b).

Income Tax Assessment Act 1997 Section 82-130.

Income Tax Assessment Act 1997 Subsection 82-130(1).

Income Tax Assessment Act 1997 Paragraph 82-130(1)(a).

Income Tax Assessment Act 1997 Paragraph 82-130(1)(b).

Income Tax Assessment Act 1997 Paragraph 82-130(1)(c).

Income Tax Assessment Act 1997 Section 82-135.

Income Tax Assessment Act 1997 Section 82-135 (i)

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

Ex gratia payment 

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer who is a resident of Australia for taxation purposes includes the ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. 

The ex gratia payment that you have received has the characteristics of a capital receipt (not an income receipt) as you did not earn it and it does not directly relate to services that you performed. The payment is also a one-off payment (it does not have the elements of periodicity, recurrence or regularity). Any expectation and reliance upon the payment arises from the discharge agreement. 

The ex gratia payment was not paid to compensate you for future income maintenance payments under the policy. Rather, the ex gratia payment was paid to you for the pain and suffering, and medical expenses you incurred and that you will not seek re-employment with the compensating authority or the employer at any time in the future. As such, you received the ex gratia payment as compensation for giving up your capital rights. 

Accordingly, the ex gratia payment is not considered ordinary income and therefore, not assessable under subsection 6-5(2) of the ITAA 1997. However, section 6-10 of the ITAA 1997 specifically includes certain other amounts in your assessable income.

Section 6-10 of the ITAA 1997 provides that assessable income also includes statutory income, that is, income which is not ordinary income that is included in assessable income by another provision of the income tax legislation. Certain types of payments and capital gains are examples of statutory income. 

Capital Gains Tax (CGT)

Section 118-37 of the ITAA 1997 states that you may disregard any capital gain or capital loss from any capital gains tax event 'relating directly .... to compensation or damages you receive for any wrong or injury you suffer in your occupation.'

Accordingly, the lump sum payment you received for pain and suffering, and medical expenses is not assessable under either section 6-5 or section 102-5 of the ITAA 1997.

As you agreed to resign from your employment we need to consider whether the lump sum payment received by you is considered to be an eligible termination payment.

Employment termination payment (ETP)

Section 82-130 of the ITAA 1997

Subsection 82-130(1) of the ITAA 1997 states that:

A payment is an employment termination payment if:

· it is received by you:

· in consequence of the termination of your employment; or

· after another person's death, in consequence of the termination of the other person's employment; and

· it is received no later than 12 months after that termination (but see subsection (4)); and

· it is not a payment mentioned in section 82-135.

Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including:

· payments for unused annual leave or unused long service leave;

· the tax-free part of a genuine redundancy payment or an early retirement scheme payment.

· reasonable capital payments for personal injury.

Paid as a consequence of the termination of your employment

If the payment follows as an effect or a result from the termination of employment, the payment will be made in consequence of the termination of employment for the purposes of subparagraph 82-130(1)(a)(i) of the ITAA 1997. Hence the payment will be an employment termination payment unless the payment is specifically excluded under section 82-135 of the ITAA 1997.

The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

It is considered that the payment will be made in consequence of the termination of your employment. Therefore the first requirement under subparagraph 82-130(1)(a)(i) of the ITAA 1997 has been satisfied.

The payment is received no later than 12 months after termination

The second condition for the payment to meet the criteria, as an employment termination payment is stated under paragraph 82-130(1)(b) of the ITAA 1997. The payment must be received within 12 months of your termination of employment, unless you are covered by a determination exempting you from the 12 month rule.

The final requirement under paragraph 82-130(1)(c) of the ITAA 1997 is that the payment is not a payment mentioned in section 82-135 of the ITAA 1997.

Exclusions under section 82-135 of the ITAA 1997

Certain payments made on termination of employment are excluded from being an employment termination payment under section 82-135 of the ITAA 1997. These payments include any accrued annual and long service leave and the tax-free parts of a genuine redundancy payment or an early retirement scheme payment as well as certain other payments.

In your case, consideration must be given as to whether some or all of the payment is covered by the specific exemption in subsection 82-135(i) of the ITAA 1997.

This subsection states that employment termination payments do not include:

· a capital payment for, or in respect of, personal injury to you so far as the payment is reasonable having regard to the nature of the personal injury and its likely effect on your capacity to derive income from personal exertion (within the meaning of the definition of income derived from personal exertion in subsection 6(1) of the Income Tax Assessment Act 1936);

This exclusion is for a payment or benefit that compensates or reimburses the taxpayer for or in respect of the particular injury.

For an amount to meet the definition of consideration in paragraph (i) of the definition of employment termination payment, the payment must be for personal injury and be calculated by reference to the nature and extent of the injury or likely loss to the employee.

In your particular case, the Tribunal recommended that the compensation authority to pay you as an ex-gratia payment basis for pain and suffering and medical expenses. In this recommendation the Tribunal also clearly stated that you have suffered no economic loss.

Accordingly, it is considered that subsection 82-135(i) of the employment termination payment definition under section 82-135 of the ITAA 1997 applies to the amount , and it is excluded from being an employment termination payment.

Therefore, the ex gratia payment you received for pain and suffering, and medical expenses is not included in your assessable income.

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