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This edited version has been archived due to the length of time since original publication.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: 1051457231936

Date of advice: 10 December 2018

Ruling

Subject: Assessability of a settlement payment

Question 1

Is the lump sum settlement payment of $XX,XXX from Employer X assessable income?

Answer

No. Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that an amount is included in assessable income if it is income according to ordinary concepts (ordinary income). Whether or not a particular receipt is ordinary income depends on its character in the hands of the recipient.

The settlement payment is not assessable as ordinary income as it is not a product of any employment, services or business carried on by you and it does not have the characteristics normally associated with ordinary income, rather, we consider this compensation to be related to your claim of specific injury.

Accordingly, the compensation received by you will be capital in nature and does not constitute ordinary income under subsection 6-5(1) of the ITAA 1997.

Question 2

Is the lump sum settlement payment of $XX,XXX from Employer X a disregarded capital gain?

Answer

Section 118-37(1) of the Income Tax Assessment Act 1997 (ITAA 1997) allows for a capital gain made from a Capital Gains Tax (CGT) event to be disregarded if the CGT event relates directly to compensation or damages received for any wrong or injury suffered in a taxpayer’s occupation or for any wrong or injury suffered personally. Using the look through approach the payment your received was solely related to your specific injury sustained at work and is therefore disregarded for CGT purposes.

This ruling applies for the following period:

Year ending 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

You were employed by Employer X in an Australian state until late 20XX at which time you resigned from your employment.

You submitted a claim for compensation pursuant to the Return to Work Act 2014 on the basis that you claimed that you suffered a specific injury related to the death of a co-worker in late 20XX.

This application was rejected by Employer X and an application for review was made with the Tribunal.

Employer X denied that it has any liability.

The parties have agreed to settle the complaints and the differences between them on the basis of an agreement and you have supplied a copy of the Release and Discharge Agreement in support of this application. Employer X has offered to pay the amounts of –

The $XX,XXX is referred to as the settlement sum in the Release and Discharge Agreement and is the full settlement of your claims.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-37

Income Tax Assessment Act 1997 subsection 6-5(1)

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