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This edited version has been archived due to the length of time since original publication.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: 1051312508387

Date of advice: 29 November 2017

Ruling

Subject: Assessability of your lump sum compensation payment

Question 1

Is the compensation payment you received for injuries, travel expenses and treatment expenses assessable income?

Answer

No.

Question 2

Will any capital gain arising from the compensation payment you received for injuries, travel expenses and treatment expenses amount be disregarded?

Advice/Answers

Yes.

Question 3

Is the compensation payment you received for loss of earnings assessable income?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2017

The scheme commences on:

1 July 2016

Relevant legislative provisions

Section 6-5 of the ITAA 1997

Section 118-37 of the ITAA 1997

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Ordinary income has been held to include income from providing 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:

A compensation amount normally assumes the nature of that which it is designed to replace. If the compensation is paid for the loss of a capital asset or amount, then it will be regarded as a capital receipt and not ordinary income.

Loss of earnings

The compensation being offered to you for loss of earnings is to replace income that would have been earned, expected, relied upon and would have had an element of periodicity, recurrence or regularity. It has been held in court that payments paid to replace past income are considered to be assessable.

Taxation Determination TD 93/58 deals with the circumstances under which receipts from a lump sum compensation/settlement payment is assessable. A receipt is assessable:

In your case, the element of the compensation payment that refers to the loss of past earnings is considered to be income and therefore assessable.

Injuries, travel expenses and treatment expenses

The component of the compensation payment you received for injuries sustained, travel expenses and treatment expenses was not earned as it does not relate to services performed. The payment would also be a one off payment, and thus it would not have an element of recurrence or regularity. Although it can be said to be expected, and perhaps relied upon, this expectation arises from the damage and suffering, rather than from a relationship to personal services performed. Therefore this amount is considered capital.

Capital Gains

Section 118-37 of the ITAA 1997 states that you may disregard any capital gain or capital loss from any capital gains tax event relating directly to compensation or damages you receive for any wrong, injury or illness you suffer personally.

The lump sum amount paid to you meets this description.

Section 118-37 of the ITAA 1997 will apply to the lump sum amount so that any capital gain or capital loss you make will be disregarded.

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