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Edited version of your written advice

Authorisation Number: 1012846605490

Date of advice: 23 July 2015

Ruling

Subject: Lump sum compensation payment

Question

Will the amount of compensation you received for the destruction of property which is solely for private use be included in your assessable income?

Answer

No

This ruling applies for the following period

The year ended 30 July 2015

The scheme commences on

1 July 2014

Relevant facts and circumstances

Property that you use solely for private use was destroyed or damaged by a third party.

You submitted a claim for damages to the third party's insurer.

The insurer paid you a lump sum compensation payment to cover the damage.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 6-1(1)

Income Tax Assessment Act 1997 subsection 6-5(1)

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 100-20

Income Tax Assessment Act 1997 section 108-5

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

Reasons for decision

Assessable income

Subsection 6-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that assessable income consists of:

If an amount is not ordinary income and is not statutory income it is not assessable income, so you do not have to pay income tax on it (subsection 6-15(1) of the ITAA 1997).

Ordinary income 

Ordinary income is income according to ordinary concepts (subsection 6-5(1) of the ITAA 1997).

 Ordinary income is generally considered to include:

In your case, the insurance compensation payment is a one-off payment that relates to personal circumstances that have arisen. It is not a payment for services rendered, and there is no expectation of receiving the payment on a regular basis so that you are able to depend upon it for your regular expenditure.

Consequently, the lump sum payment is not ordinary income.

Statutory income

Statutory income is not ordinary income, but is included in assessable income by specific provisions of the income tax law (section 6-10 of the ITAA 1997).

These specific provisions are listed in section 10-5 of the ITAA 1997. Included in the list are capital gains, which are included in assessable income by virtue of the capital gains tax (CGT) provisions. 

Capital gains tax (CGT) provisions 

Section 102-5 of the ITAA 1997 provides that assessable income includes any net capital gain (the total of capital gains for the income year, reduced by certain capital losses). 

You can make a capital gain (or loss) only if a CGT event happens (section 100-20 of the ITAA 1997). Most CGT events involve a CGT asset, which is defined in section 108-5 of the ITAA 1997 as:

Taxation Ruling TR 95/35 considers the CGT consequences for a person who receives an amount as compensation. The ruling states that a right to seek compensation is an asset for the purposes of the CGT provisions, and that a right to seek compensation is:

TR 95/35 discusses compensation received under a policy of insurance, and states that an insured's right of indemnity under an insurance policy is a right to seek compensation. 

In your case, the right of indemnity was acquired when the triggering event occurred, that is, when your property was damaged due to a third party. The payment of the claim by the third party's insurer resulted in the disposal of your right of indemnity. This disposal of your right to seek compensation gives rise to a CGT event. 

However, there is a CGT exemption for compensation for personal injury. Paragraph 118-37(1)(b) of the ITAA 1997 allows you to disregard a capital gain or loss you make from a CGT event relating to compensation you receive for any wrong, injury or illness you suffer personally. The destruction of part of your property by a third party is considered to be a wrong suffered by you.

Therefore, any capital gain that you may have made from disposing of your right to seek compensation is disregarded under paragraph 118-37(1)(b).

Consequently, it is not assessable income (subsection 6-15(1) of the ITAA 1997).

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