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Ruling

Subject: Foreign income - pension - compensation payment

Question

Is the weekly payment received as compensation for loss of faculty caused by exposure to asbestos dust included as assessable income?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You received a weekly pension payment from a foreign pension service.

The payment was to compensate you for the loss of faculty caused by exposure to asbestos dust.

You state that there is no component for loss of earnings in the payment.

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from both in and out of Australia during the income year.

Ordinary income has the characteristic of being periodic, recurring and regular. A pension or benefit payment is therefore ordinary income.

Other characteristics of income that have evolved from case law include receipts that:

In your case, you have not earned the compensation payments as they do not directly relate to services performed. Rather the payments relate to personal circumstances that have arisen. Whilst the payments can be said to be expected, and perhaps relied upon, this expectation arises from the pain and suffering as a result of your illness, rather than from a relationship with personal services performed. Therefore, the weekly compensation payments are not considered ordinary income. The fact the benefit is paid weekly and not in a lump sum does not make the amounts ordinary income.

As such, the payments you receive from the relevant section of the foreign pension service are not assessable under subsection 6-5(2) of the ITAA 1997.

Capital gains tax (CGT) implications

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

The disposal of an asset gives rise to a CGT event. However, paragraph 118-37(1)(b) of the ITAA 1997 disregards the payments or receipts where the amount relates to compensation or damages received for any wrong, injury or illness you suffered.

Consequently, the weekly compensation payments you received for loss of faculty caused by exposure to asbestos dust are not included in your assessable income.

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