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This edited version has been archived due to the length of time since original publication.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: 1051305543334

Date of advice: 7 November 2017

Ruling

Subject: Compensation

Question 1

Is any part of your lump sum payment assessable as ordinary income or as a capital gain?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You suffer from a medical condition said to have resulted from your employment.

You are a member of a superannuation fund which entered into a Group Life Insurance Policy in respect of the fund.

As a result of your condition, you made a Total and Permanent Disability (TPD) claim against your superannuation funds insurer. The claim included the contention that as a result of your medical condition you ceased employment.

Your superannuation fund’s insurer assessed the TPD claim and declined it by letter to the fund.

You filed a Statement of Claim against the superannuation fund and the insurer to the fund.

Your superannuation fund and its insurer deny they are liable in any way to you in respect of the claims and without any admission of liability they and you have agreed to resolve the claim.

Your superannuation fund and its insurer agreed to pay a settlement sum noted in a deed of release, in full and final settlement without admission of liability.

You propose to accept the offer, and agree to a release and indemnity of your superannuation fund and its insurer from any further claim or liability in respect of this matter.

The lump sum settlement will be paid to your solicitors trust account.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5,

Income Tax Assessment Act 1997 Section 6-10 and

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

Reasons for decision

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) defines an Australian resident for taxation purposes as a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936).

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 complaint where entitlement to receive a payment under a Total and Permanent Disability (TPD) claim was in dispute. It is not a lump sum payment which substitutes for an income stream but rather for entering into a settlement agreement with the insurer for the purpose of surrendering your rights 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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