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Edited version of your written advice

Authorisation Number: 1012853032990

Ruling

Subject: Compensation payment

Question 1

Is the compensation payment that you received on behalf of your late spouse assessable?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

You received a compensation payment on behalf of your late spouse.

The payment related to a disease related claim for specific victims.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 6-10.

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

Reasons for decision

Section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident 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:

The compensation payment you have been paid is not income from rendering personal services, income from property or income from carrying on a business.

The payment is also not earned, expected, relied upon and is a one off payment and thus it does not have an element of recurrence or regularity.

The compensation payment is not considered to be ordinary income.

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 compensation 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, (or a relative of the person), receives for any personal wrong, injury or illness.

'Relative' is defined under section 995-1 of the ITAA 1997 to include a person's spouse.

In your case, the payment was made to you on behalf of your deceased spouse relating to a disease related claim. The payment is considered to be exempt from CGT under paragraph 118-37(1)(b).

As the amount is not ordinary or statutory income it is not assessable income. Therefore no part of the settlement amount is required to be included in your income tax return.

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