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Edited version of your private ruling
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Ruling
Subject: Lump sum compensation payment for a work related injury
Questions and answers:
Is the lump sum compensation payment you received, as a result of a work related injury, assessable income in the relevant year?
No.
This ruling applies for the following period:
Year ended 30 June 2011.
The scheme commenced on:
1 July 2010.
Relevant facts:
You are an Australian resident for taxation purposes.
You had an accident at work.
You received a lump sum compensation payment.
You received the one off payment in the relevant financial year.
The payment is as a result of workers compensation.
By accepting the lump sum payment, you have given up any rights to be paid for future medical treatments and or any other treatments.
No part of the payment has been identified as replacement of income.
Relevant legislative provisions:
Income Tax Assessment Act 1997 Section 6-5.
Income Tax Assessment Act 1997 Section 6-5(2).
Income Tax Assessment Act 1997 Section 6-10.
Income Tax Assessment Act 1997 Section 10-5.
Income Tax Assessment Act 1997 Section 102-5.
Income Tax Assessment Act 1997 Section 118-37.
Reasons for decision
Assessable income
Subsection 6-5(2) 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.
Section 6-10 of the ITAA 1997 provides that your assessable income also includes amounts which are not ordinary income. These amounts are referred to as statutory income and are listed in section 10-5 of the ITAA 1997. The list includes capital gains which are included in your assessable income by section 102-5 of the ITAA 1997.
Assessable income - compensation
Taxation Ruling TR 95/35 discusses when a compensation receipt will be ordinary income, such as if the sum was calculated as a direct compensation for loss of income with reference to lost salary and wages and or a part is separately identifiable and quantifiable as income.
No part of the compensation sum was identifiable as an amount for lost income. Accordingly, no part of the compensation will be included in your assessable income as ordinary income under section 6-5 of the ITAA 1997.
TR 95/35 specifies that compensation sums which are not ordinary income, are considered capital in nature and are potentially assessable under the capital gains provisions.
However section 118-37 of the ITAA 1997 provides that you can disregard any capital gain from a settlement/compensation amount you receive for a personal wrong, injury or illness suffered in your occupation.
The lump sum was paid as a result of a work related injury and you are entitled to disregard any capital gain arising from the payment.
Conclusion
No portion of the compensation sum will be included in your assessable income for taxation purposes.
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