Edited version of private ruling

Authorisation Number: 1011587337289

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Ruling

Subject: Compensation receipt

1. Is the lump sum compensation amount you have been offered from your income protection policy assessable income?

No.

2. Does the lump sum compensation amount you have been offered from your income protection policy give rise to any capital gains implications?

No.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You sustained an injury at work.

You submitted a claim for compensation for the injury.

You were in receipt of compensation payments from your employer.

You were certified as having ceased to be incapacitated for work by a doctor a month after your employer accepted liability.

You alleged that you continued to be incapacitated as a result of the injury and continued to seek compensation from your employer.

You issued a number of applications for compensation as your benefits were reduced and eventually cancelled.

You received a lump sum payment as settlement of your claims in 2010.

Should you make a claim for further compensation in respect of the injury in the future, you will be liable to repay to your employer the total amount of the lump sum plus interest.

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1997

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our 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 all sources during the income year.

Ordinary income has generally been held to include three 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:

· are earned

· are expected

· are relied upon, and

· have an element of periodicity, recurrence or regularity.

The compensation amount being offered to you is not income from rendering personal services, income from property or income from carrying on a business. The payment is also a one off payment and thus it does not have an element of recurrence or regularity.

A compensation amount generally bears the character of that which it is designed to replace. If a lump sum payment is paid for the loss of a capital asset or amount then it will be regarded as a capital receipt and not ordinary income.

Taxation Determination TD 93/58 states that any part of a lump sum compensation amount will only be assessable as ordinary income:

· if the payment is compensation for loss of income only..., or

· to the extent that a portion of the lump sum is identifiable and quantifiable as income. This is possible where the parties either expressly or impliedly agree that a certain portion of the payment relates to a loss of an income nature.

The lump sum compensation payment you received is in settlement of your injury at work. As your lump sum payment is not paid specifically as compensation for loss of income, we consider the lump sum payment is of a capital nature.

As the payment is not ordinary income it will not be assessable income to you under section 6-5 of the ITAA 1997.

Capital gains tax

Subsection 108-5(1) of the ITAA 1997 defines a capital gains tax (CGT) asset as any kind of property or a legal or equitable right that is not property.

You make a capital gain or capital loss if and only if a CGT event happens. CGT events are the different types of transactions or happenings which may result in a capital gain or a capital loss.

The disposal of an asset gives rise to a CGT event. In your case the disposal gives rise to CGT event C2.

However, section 118-37(1)(b) of the ITAA 1997 states that a capital gain may be disregarded where the amount received relates to compensation or damages for a wrong, injury or illness you suffer personally.

As your claim relates directly to a personal illness or injury, any capital gain or loss you make from surrendering your rights will be disregarded.

Therefore, the amount received will not be statutory income.

Tax consequences for you

Section 6-15(1) if the ITAA 1997 provides that if an amount is not ordinary or statutory income it is not assessable income.

The lump sum amount awarded to you is not assessable income in your hands.

Note: Although the lump sum amount is not assessable income in your hands any amount that is earned from the use of the lump sum may be assessable. The non assessable characteristic of the lump sum is not carried through to income derived from it.

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