Edited version of private advice

Authorisation Number: 1052381128503

Date of advice: 07 April 2025

Ruling

Subject: Compensation payment - lump sum

Question 1

Is the lump sum compensation payment you received for total and permanent disability (TPD) in your occupation considered assessable income?

Answer 1

No. In your case the once-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. 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 capital gains tax (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, injury or illness suffered personally at work'.

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 lump sum 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 amount in your assessable income on your tax return.

This ruling applies for the following period:

For the income year ending DDMMYYYY

The scheme commenced on:

DDMMYYYY

Relevant facts and circumstances

You (X) are a qualified Hairdresser by trade and was self-employed in your occupation.

You held a Recovery Insurance Policy with X for TPD in your occupation (Policy number X).

You were insured for $X with an expiry date of DDMMYYYY and you paid a quarterly premium.

You had developed a medical condition which was made worse due to many years of using chemicals and sprays in your occupation. You also had chronic pain especially in your neck, shoulders, arms and hands due to your occupation.

Due to your medical condition, your general practitioner and specialist filed medical reports that validated your injuries.

You made a claim through an insurance company for TPD which was accepted on DDMMYYYY and you were paid a lump sum amount of $X in compensation.

The compensation payment was made to you as a final offer from the company and you have no further rights to seek compensation from them.

No tax or stamp duty was withheld from the compensation payment.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 118-37

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

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