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This edited version has been archived due to the length of time since original publication.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.

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Edited version of your written advice

Authorisation Number: 1012806233058

Ruling

Subject: Compensation-lump sum payment

Question 1:

Will the lump sum compensation payment that you received for damages arising from a dispute with a retirement fund included in your assessable income?

Answer:

No.

Question 2:

Will your lump sum compensation payment be subject to capital gains?

Answer:

No.

This ruling applies for the following period:

Year ended 30 June 2014

The scheme commenced on:

1 July 2013

Relevant facts

Your relative was a contributing member of a retirement fund (the fund).

Your relative suffered from a terminal illness.

Your relative contacted the fund to discuss their invalidity option and the effect that each option would have on the amount of benefits payable.

Your relative contacted the fund to enquire about a lump sum benefit on the basis of terminal illness.

Your relative submitted an application form electing to receive a lump sum benefits on the basis of terminal illness.

Your relative retired from work on the grounds of invalidity and was no longer considered a contributing member of the fund.

The fund was notified your relative had passed away.

You lodged a complaint with the fund as your believe your relative was not fully informed of their options in relation to the benefits payable under the scheme.

You were awarded compensation as a result or the fund breaching its duty of care to your relative as a member of the fund.

No tax was deducted from the compensation payment.

The payment is a one-off payment in full and is a final settlement of your claim. 

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 15-30.

Income Tax Assessment Act 1997 Section 102-5.

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

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income). 

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:

You have not earned the lump sum as it does not directly relate to services performed. Rather the lump sum relates to personal circumstances that have arisen as a result of the death of your relative and a breach of duty of care by the fund in respect of your relative. The payment is also a one-off payment and thus 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 an entitlement under your relative retirement scheme, rather than from a relationship with personal services performed. Accordingly, the lump sum payment is not considered ordinary income and is therefore not 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 15-30 of the ITAA 1997 lists those provisions. Included in this list is section 102-5 of the ITAA 1997 which deals with capital gains.

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

Accordingly, the compensation payment you received is not assessable under either section 6-5 of the ITAA 1997 or section 6-10 of the ITAA 1997.

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