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This edited version has been archived due to the length of time since original publication.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: 1051266355005

Date of advice: 9 August 2017

Ruling

Subject: Compensation

Question 1

Are the fortnightly compensation benefit payments you receive assessable income?

Answer

Yes.

Question 2

Is the lump sum compensation payment you received assessable income?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2016

The scheme commenced on

1 July 2015

Relevant facts

Your spouse died from a condition.

A claim was made with the relevant authority.

A lump sum compensation was paid to the deceased estate.

You made a separate claim of compensation as a dependant.

You received a lump sum payment.

You are also entitled to a fortnightly payment.

Your 201X payment summary shows a gross taxable payment amount and tax withheld.

You also receive a fortnightly Centrelink pension.

Your compensation included a lump sum amount which was paid separate to and in addition to the fortnightly benefit.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

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

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 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:

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).

Fortnightly compensation benefit payments

In your case, you have been awarded a fortnightly compensation benefit payment.

These payments have the characteristics of ordinary income as they are expected, relied upon and have the element of recurrence or regularity. Therefore the fortnightly payments including the back pay are regarded as ordinary assessable income.

Lump sum compensation payment

Part of your compensation awarded was in the form of a lump sum payment which you received.

This amount is not income from rendering personal services, income from property or income from carrying on a business. The lump sum is not earned or expected and is a one-off payment and thus does not have an element of recurrence or regularity.

The lump sum payment is not considered to be ordinary assessable income.

Similarly, the lump sum payment paid to the estate is not ordinary assessable income.

Capital gains tax (CGT)

Receipt of a lump sum payment may give rise to a capital gain (statutory income). However subparagraph 118-37(1)(a)(ii) of the ITAA 1997 disregards a capital gain where the amount relates to compensation or damages received for any 'wrong, injury or illness you or your relative suffer personally’.

The lump sum you received is considered to be exempt from CGT.

Similarly the lump sum paid to the deceased estate is also exempt from CGT.

Conclusion

As the lump sum payments are not ordinary or statutory income they are not assessable income. Therefore no part of the lump sum amounts is required to be included in your income tax return.

However, the fortnightly payments including the back pay amount is assessable income.

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