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This edited version has been archived due to the length of time since original publication.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: 1013015764318

Date of advice: 13 May 2016

Ruling

Subject: Assessability of your compensation payment

Question 1

Is the lump sum payment you will receive under the Deed, assessable as ordinary income?

Answer

No.

Question 2

Is the lump sum payment you will receive under the Deed, included in assessable income under the capital gains provisions?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

You completed a claim for Worker's Compensation under the Safety, Rehabilitation and Compensation Act 1988 (SRC) (Commonwealth), claiming to have sustained a medical condition over 12 months prior to the claim.

The liability was accepted by your employer's insurer in respect of your claim, and Worker's Compensation payments commenced.

Two years later, your employer's insurer denied liability to pay compensation for permanent impairment and non-economic loss, medical treatment and incapacity payments.

You then applied to the Administrative Appeals tribunal (AAT) for a review of the decisions, alleging that the incident was caused by the negligence and/or breach of duty by your former employer.

You and your former employer entered into a Deed to resolve the dispute and to pay you a Settlement Sum made up of a common law payment, legal costs and reasonable disbursements, subject to proof.

You have executed an election under section 45 of the SRC Act to institute an action for damages for non-economic loss in respect of the injury.

The Settlement Sum includes any amounts owing to Medicare, Centrelink, and/or any third parties, and is paid in full and final settlement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Subsection 6-10

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 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:

The lump sum payment you accepted 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.

Your settlement is a result of you making a claim for Worker's Compensation and in return forgoing any entitlement to further compensation for permanent impairment under the SRC Act in respect of sections 24, 25, 26 and 27, following a workplace incident..

It is not a lump sum payment which substitutes for an income stream but rather for entering into a settlement agreement with the insurer under the policy. The lump sum payment is a capital receipt and is not ordinary income. Therefore the amount is not assessable under section 6-5 of the ITAA 1997.

Capital gains tax

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.

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 payment or receipts for capital gains purposes where the amount relates to compensation or damages a person receives for any personal wrong, injury or illness. The lump sum you received is considered to be exempt from CGT under paragraph 118-37(1)(b).

Conclusion

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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