Disclaimer
This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your private ruling

Authorisation Number: 1012424046277

Ruling

Subject: Compensation payment

Question and answer:

Is the compensation payment assessable income for tax purposes?

No.

This ruling applies for the following periods

Year ended 30 June 2013

The scheme commences on

1 July 2012

Relevant facts and circumstances

You will be receiving a lump sum compensation payment for a personal wrong.

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1997

Section 6-10 of the Income Tax Assessment Act 1997

Section 118-37(1)(b) of the Income Tax Assessment Act 1997

Reasons for decision

Is the lump sum compensation payment assessable as ordinary income?

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

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

In your case, the payment you are entitled to receive is compensation for suffering caused by a personal wrong.

The payment does not have the characteristics of ordinary income and was not earned by you and did not relate to services performed. The payment is also a one-off payment and 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 suffering resulting from a personal wrong.

Therefore the lump sum payment is not income according to ordinary concepts and is not assessable under section 6-5 of the ITAA 1997.

Is the lump sum compensation payment assessable as a capital gain?

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but may be assessable under another provision are called statutory income.

Receipt of a lump sum payment may give rise to a capital gain (statutory income). However paragraph 118-37(1)(b) of the ITAA 1997 disregards payments or receipts for capital gains purposes where the amount relates to compensation or damages a person receives for any personal wrong, injury or illness.

In your case, the payment will be made to you as a result of a personal wrong, and as such the payment will be exempt from capital gains tax under paragraph 118-37(1)(b) of the ITAA 1997.

Conclusion

As the lump sum compensation payment is not ordinary income or a capital gain, it is not assessable income and does not need to be included in your income tax return.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).