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This edited version has been archived due to the length of time since original publication.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: 1012986830462

Date of advice: 18 March 2016

Ruling

Subject: The assessability of your lump sum payment

Question

Is a lump sum payment received as a result of your common law claim against your employer assessable income?

Answer

No

This ruling applies for the following periods

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

You are a resident of Australia for tax purposes.

You suffered an injury while at work.

You submitted a worker's compensation claim pursuant to the relevant Workers Compensation Act for your state.

Subsequently your employer, via its insurer, accepted liability under the Act for the workers compensation claim.

You later sought an order that your employer meet the cost of surgery in respect of your injury under the Act.

Your employer denied liability under the Act to meet the cost of surgery, and defended the application.

You alleged that you had a cause of action against your employer at common law, which your employer denied.

As a result of your subsequent action for damages against your employer under common law you received a settlement sum which included an amount for legal costs.

The deed of release states that the settlement amount is a full and complete discharge of your claim against your employer, including all medical expenses, Medicare Australia and Centrelink repayments.

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(1)

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

Reasons for decision

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Ordinary income has generally been held to include 3 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:

In your case the lump sum payment was not earned by you as it does not directly relate to services performed. Rather the lump sum relates to compensation for your injury. The payment is also a one-off payment and thus does not have an element of recurrence or regularity. The payment was not expected.

The payment was not relied upon, as it does not take into account whether or not you continue to work, and/or receive your normal salary.

Thus, the lump sum payment is not ordinary income and is therefore not assessable under subsection 6-5(2) of the ITAA 1997.

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income and are also included in assessable income.

Amounts received in respect of personal injury/illness which is not for reimbursement of medical expenses, or direct compensation for loss of income will usually be capital in nature and are potentially taxable as statutory income under the capital gains tax provisions of the ITAA 1997.

Taxation Ruling TR 95/35 deals with the capital gains treatment of compensation receipts. The ruling advocates a 'look-through' approach, which identifies the most relevant asset to which the compensation amount is most directly related.

Paragraph 11 of TR 95/35 states that if an amount is not received in respect of an underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation.

As the amount received by you is not in respect of any underlying asset, the whole of the settlement amount is treated as capital proceeds from a CGT event (CGT event C2) happening to your right to seek compensation.

However, paragraph 118-37(1)(a) of the ITAA 1997 disregards a capital gain made from a CGT event where the amount relates to compensation or damages received for any 'wrong, injury or illness you ... suffer in your occupation'. Therefore, any capital gain made from the CGT event happening to your right to seek compensation is disregarded under paragraph 118-37(1)(a) of the ITAA 1997. It is thus not statutory 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 gross amount received is included in your assessable income.

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