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Edited version of your written advice
Authorisation Number: 1013107228596
Date of advice: 13 October 2016
Ruling
Subject: Compensation payments
Question 1
Is the travel insurance payments you received in compensation for an injury whilst overseas assessable income?
Answer
Yes.
This ruling applies for the following period:
Year ending 30 June 20YY
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You have a travel insurance policy which provides benefits for accidents, permanent disability and loss of income.
You travelled overseas in 20XX and during this travel you had an accident which resulted in injury.
You lodged a claim with the insurer for compensation in relation to your injury as you were unable to return to work.
The benefit would only be paid if you were unable to resume or begin your employment within 30 days of the injury. You satisfied this condition.
You received $X,XXX each month for the period of X months.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5(2)
Reasons for decision
Summary
The compensation payments you have received for loss of income will form part of your assessable income and, therefore, is subject to tax.
Detailed reasoning
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (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 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:
• are earned.
• are expected
• are relied upon, and
• have an element of periodicity, recurrence or regularity.
Your compensation is not income from rendering personal services, income from property or income from carrying on a business.
A compensation payment amount generally bears the character of that which it is designed to replace. If the compensation is paid for the loss of assessable earnings it will be regarded as ordinary income.
In your case, the compensation payments have been made in respect of loss of income in relation to the injury suffered whilst overseas.
Taxation Determination TD 93/58 states that any part of a compensation amount will only be assessable as ordinary income:
(a) if the payment is compensation for loss of income only, or
(b) to the extent that a portion of the lump sum is identifiable and quantifiable as income. This is possible where the parties either expressly or impliedly agree that a certain portion of the payment relates to a loss of an income nature.
As your compensation payments have been paid specifically as compensation for loss of income, we consider the payments to be assessable income, and therefore subject to tax.
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