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Edited version of private advice
Authorisation Number: 1052154768615
Date of advice: 28 August 2023
Ruling
Subject: Lump sum compensation
Question
Can the lump sum payment be treated as capital in nature and disregarded under 118-37 of the Income Tax assessment Act 1997?
Answer
Yes. In your case the lump sum payment is for compensation due to a physical injury sustained at work. The one-off lump sum payment is not income according to ordinary concepts and is not assessable under section 6-5 of the Income Tax assessment Act 1997 (ITAA 1997). The payment bears none of the characteristics of ordinary income as it lacks any element of periodicity, recurrence or regularity. Since you had reached retirement age, the payment represents loss of earning capacity. Therefore, the lump sum payment is capital in nature and will not be assessable as ordinary income.
Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income may be assessable under another provision are called statutory income. Receipt of a lump sum payment may give rise to a capital gain (statutory income). 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 payment was made to you for compensation for a 'wrong or injury you have suffered in your occupation' in respect of your workplace injury.
Therefore, any capital gain or capital loss arising from a CGT event will be disregarded under subparagraph 118-37(1)(a)(i) of the ITAA 1997 and the payment will not be assessable as statutory income.
As the lump sum payment is not assessable as either ordinary or statutory income, you are not required to include the amounts in your assessable income.
This ruling applies for the following period:
Period ended 20XX
The scheme commenced on:
1 July 20XX
Relevant facts and circumstances
You were a self-insured sole trader.
You had an injury on XXXX 20XX and ceased working.
You were paid income periodic protection payments from XXXX 20XX.
Your disability was reclassified to an injury by XXX and you agreed to a lump sum settlement.
A contract (deed of release) was signed on XXXX 20XX.
In XXXX 20XX, at post retirement age, you received a lump sum compensation payment from XXX for $XXX.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 6-5(2)
Income Tax Assessment Act 1997 Section 6-10
Income Tax Assessment Act 1997 Paragraph 118-37 (1)(a)
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