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Edited version of your written advice

Authorisation Number: 1012809976769

Ruling

Subject: Compensation received from State Government

Question

Is the compensation payment you received, that was described as being for loss of earnings, assessable income?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

You were the victim of a crime and were injured.

You were on leave from your employment for a period of time as you were recovering from your injuries. During this period you utilised your leave entitlements, including annual leave, and you were paid by your employer for the entire time you were absent from work.

You received a lump sum payment from the relevant State Government as compensation under a victim of crime regime. This payment included an amount that has been described as a payment to compensate you for loss of earnings.

The relevant State Government sent you a Notice of Decision to grant assistance. This notice of decision indicates that the payment described as loss of earnings was actually to compensation you for the fact that you were not able to use your annual leave in the manner planned. You have provided a copy of this Notice of Decision and it is to be read with and forms part of this private ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5,

Income Tax Assessment Act 1997 Section 6-10 and

Income Tax Assessment Act 1997 Section 118-37.

Reasons for decision

Section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provide that the assessable income of a taxpayer includes ordinary and statutory income derived directly and 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:

An amount paid to compensate for loss generally acquires the character of that for which it is substituted (FC of T v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (FC of T v. Inkster (1989) 20 ATR 1516; 89 ATC 5142; Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641; Case Y47 (1991) 22 ATR 3422; 91 ATC 433).

However, while the payment made to you has been described as a payment to compensate you for a loss of earnings, the fact that you did not actually suffer any loss of earnings leads to the conclusion that this payment has been described incorrectly. The Notice of Decision to grant assistance that was issued to you by the relevant State Government strongly indicates that this payment was made to compensate you for the loss of the ability to enjoy your holiday as a result of the crime.

The lump sum payment you received is not income from rendering personal services, income from property or income from carrying on a business. The amount was also not earned, expected or relied upon and thus does not have an element of recurrence of regularity.

Therefore the payment that you received is not considered to be ordinary income.

Capital gains tax (CGT)

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 a capital gain where the amount relates to compensation or damages received for any 'wrong, injury or illness you or your relative suffer personally'.

Accordingly, the lump sum you received is exempt from CGT.

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