Edited version of your private ruling

Authorisation Number: 1012612392095

Ruling

Subject: Compensation payment

Question 1

Is the lump sum compensation payment you received assessable income?

Answer

No

Question 2

Do the party A payments remain assessable income after reimbursement from your lump sum compensation settlement?

Answer

Yes

Question 3

Do the party B payments remain assessable income after reimbursement from your lump sum compensation settlement?

Answer

Yes

This ruling applies for the following periods

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commences on

1 July 2011

Relevant facts and circumstances

You were injured at work.

You received an amount for replacement of wages from a Party A for a certain period of time. Tax was withheld from these payments.

Part A also paid amounts towards your medical and travel expenses.

You also received an amount from Party B. Tax was withheld from this payment.

You received a total settlement for your injury.

The total settlement was dispersed as follows:

• An amount to Party B to reimburse them for an amount paid to you.

• An amount to Party A to reimburse them for the replacement of income and other expenses paid for you.

• An amount to your solicitors & barrister

• An amount for your disbursement loan

• The remaining lump sum was deposited into your nominated bank account.

Party B amended your relevant PAYG Payment summary and reduced your taxable payment to $nil with no change to tax withheld.

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 subsection 59-30(3)

Income Tax Assessment Act 1997 section 102-5

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

Reasons for decision

Compensation Payment - Lump Sum Amount

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

• have an element of periodicity, recurrence or regularity.

The compensation amount you received 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. Although the payment can be said to be expected, and perhaps relied upon, this expectation arises from the injury, rather than from a relationship to personal services performed.

Taxation Determination TD 93/58 Income tax: under what circumstances is the receipt of a lump sum compensation/settlement payment assessable? advises that where a taxpayer receives an undissected lump sum which includes both income and capital elements which cannot be identified or quantified, the whole of the lump sum is treated as a capital amount.

Compensation receipts which substitute for income have been held by the courts to be income under ordinary concepts. However, no component of the amount you received was received to compensate for loss of income. Any portion relating to past or future economic loss is compensation for loss of earning capacity (a capital asset) rather than for actual loss of income.

Accordingly, no part of the lump sum compensation payment will be assessable under section 6-5 of the ITAA 1997.

Capital gains tax arising from the compensation payment

Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision.

Section 10-5 of the ITAA 1997 lists those provisions. Included in this list is section 102-5 of the ITAA 1997 which deals with capital gains.

Amounts received in respect of personal injuries which are not for reimbursements of medical expenses, or direct compensation for loss of income will usually be capital in nature and are potentially taxable as statutory income under the capital gains tax provisions of the ITAA 1997.

Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts(TR 95/35) deals with the capital gains treatment of compensation receipts. The ruling advocates a look-through approach, which identifies the most relevant asset to which the compensation amount is most directly related. Paragraph 18 of TR 95/35 states that if the amount of compensation received is an undissected lump sum, the whole amount is treated as being consideration received for the disposal of the right to seek compensation.

The disposal of a taxpayer's right to seek compensation triggers the capital gains tax provisions and the settlement amount is treated as capital proceeds.

However, paragraph 118-37(1)(b) of the ITAA 1997 disregards a capital gain where the amount relates to compensation or damages received for any 'wrong, injury or illness you ... suffer personally'.

In your case, you will not be subject to capital gains tax in respect of the amount you received to compensate you for the injuries you received at work.

Replacement of wages

You received regular payments as a result of your injury. At the time these payments were made they were treated as ordinary income and you were taxed accordingly. Amounts that are income according to ordinary concepts are included in assessable income by section 6-5 of the ITAA 1997.

Where a taxpayer is entitled to income and is correctly paid an amount, but subsequent events resulted in the taxpayer no longer being entitled to that income that income would be considered to be non-assessable income and an amendment to the income tax can be made.

However, subsection 59-30(3) of the ITAA 1997 applies to exclude income from being considered as non-assessable income, where an amount has been repaid because you received a lump sum payment as settlement of your damages action.

In your case, you correctly received income in the form of regular payments as a replacement of wages for a period of time and this was considered to be assessable income. Tax was withheld from these payments. You have later accepted a lump sum settlement for your injury and part of this settlement was disbursed to Party A to repay the replacement of income you received.

The replacement of wages that you received remains assessable income by the provision of section 59-30 of the ITAA 1997. There will be no change to your assessable income and the amounts will be taxed at your marginal tax rate.

Other payment received

You received payments over a period of time and this was considered to be assessable income. Tax was withheld from these payments. You have later accepted a lump sum settlement for your injury and part of this settlement was disbursed to Party B to repay your amount. Party B amended your PAYG payment summary to show no payments were paid to you by Party B as they were reimbursed, however tax has been withheld.

Notwithstanding that an amended payment summary has been provided to you the amount you received remains assessable income by the provision of section 59-30 of the ITAA 1997. There will be no change to your assessable income and the amounts will be taxed at your marginal tax rate.

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