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Edited version of your written advice

Authorisation Number: 1012964702874

Date of advice: 11 February 2016

Ruling

Subject: compensation

Question

Is the lump sum compensation payment you received included in your assessable income?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts and circumstances

You received injuries following a workplace accident. You finished work with your employer shortly after the accident.

You filed a writ of summons claiming damages against your previous employer in respect of the injuries.

Your previous employer offered you compensation and an amount towards your legal costs.

You received the lump sum in early 20XX.

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 6-15.

Income Tax Assessment Act 1997 Subdivision 20-A

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

Detailed reasoning

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes the ordinary income derived directly or indirectly from all sources, whether in or out of Australia, 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:

For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; 10 ATD 82).

Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; (1989) 20 ATR 1516; 89 ATC 5142, Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641, and Case Y47 (1991) 22 ATR 3422; 91 ATC 433).

In your case, no amount you received was to compensate you for loss of income.

The lump sum payment you received is not earned by you as it does not relate to services performed. Rather the lump sum relates to your injury. 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 your personal injury, rather than from a relationship with personal services performed.

Therefore the lump sum is not assessable income under subsection 6-5(2) of the ITAA 1997.

The contributions you received for legal expenses do not have the characteristics of income according to ordinary concepts and are therefore not assessable as ordinary income under subsection 6-5(2) of the ITAA 1997. 

Section 6-10 of the ITAA 1997 provides that your 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 provisions about assessable income. Included in the list is subdivision 20-A of the ITAA 1997 which deals with amounts received by way of a recoupment for deductible losses or outgoings.

As your legal expenses relate to your personal injury and capital in nature, no deduction is allowable. Therefore the amount is not an assessable recoupment under subdivision 20-A of the ITAA 1997.

Amounts received in respect of personal injury is generally capital in nature and are potentially taxable as statutory income under the capital gains tax (CGT) provisions of the ITAA 1997.

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

In your case, paragraph 118-37(1)(b) of the ITAA 1997 applies. This means that the compensation you received is not included in your assessable income under the CGT provisions.

The compensation payment you received is not assessable as either ordinary income or statutory income, and is therefore not included in your assessable income. Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary or statutory income it is not assessable income. Consequently no part of the amount you received is included in your assessable income. Therefore your payment is not included on your tax return.

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