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Edited version of your written advice
Authorisation Number: 1051255785522
Date of advice: 21 July 2017
Ruling
Subject: Lump sum payment
Question
Is the lump sum payment you received or any portion thereof assessable as either ordinary income or as a capital gain?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2017
The scheme commences on
1 July 2016
Relevant facts and circumstances
You sustained an injury as a result of a work place incident.
Due to this injury you were assessed as suffering a percentage of whole person impairment (WPI).
As the injury resulted in you having a degree of permanent physical impairment, you’ve received a dissected lump sum payment that was based on a sum prescribed by statue.
The first component was paid for 'loss of future earning capacity’. The calculation took into account the prescribed sum that applied to your degree of WPI, your age and the proportion of full-time work performed at the time of the injury.
The second component was paid for 'non-economic loss’ and calculated as a proportion of the prescribed sum for the degree of WPI caused by the work injury.
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 104-25
Income Tax Assessment Act 1997 subparagraph 118-37(1)(a)(i)
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 (for example, capital gains) derived directly and indirectly from all sources, whether in or out of Australia during the income year
The ITAA 1997 does not provide specific guidance on the meaning of ordinary income. However, a substantial body of case law exists which identifies its likely characteristics. Amounts that are periodic, regular or recurrent and relied upon by the recipient for their regular expenditure are likely to be ordinary income, as are amounts that are the product of any employment of, or services rendered by, the recipient. Further, amounts which compensate for lost income or serve as a substitute for other income are themselves income according to ordinary concepts.
In your case, you have received a dissected lump sum payment as a result of being assessed as suffering a degree of permanent impairment (being whole person impairment) from a physical injury sustained at work.
The component paid for 'loss of future earing capacity’ has no characteristics of ordinary income and is based on a sum prescribed by statute which bears no relationship to your current or former earnings.
The component paid for 'non-economic loss’ is calculated as a proportion of the prescribed sum for the degree of WPI caused by the work injury. It is a one-off lump sum payment baring none of the characteristics of ordinary income as it lacks any element of periodicity, recurrence or regularity, and nor is it paid to compensate for loss of income.
Therefore, both components of the lump sum paid are capital in nature and will not be assessable as ordinary income.
Statutory income
The receipt of a lump sum compensation amount may give rise to a capital gain (statutory income) under CGT event C2 (section 104-25 of the ITAA 1997) which relates to cancellation, surrender or similar endings. However, a capital gain or loss made upon the ending of a CGT asset acquired on or after 20 September 1985 is disregarded under subparagraph 118-37(1)(a)(i) of the ITAA 1997, if the CGT event is in relation to compensation or damages received for any wrong or injury you suffer in your occupation.
In your case, the lump sum payments have been received as compensation for a 'wrong or injury you have suffered in your occupation’, being the loss of body functionality in respect of your workplace injury.
Therefore, any capital gain or capital loss arising from the CGT event will be disregarded under subparagraph 118-37(1)(a)(i) of the ITAA 1997 and the payments will not be assessable as statutory income.
As the lump sum payments are not assessable as either ordinary or statutory income, you are not required to include the amounts in your assessable income.
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