Edited version of private ruling

Authorisation Number: 1011508449115

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Ruling

Subject: Assessability of lump sum

Question

Is the lump sum payment you received to dismiss the proceedings you commenced assessable as a capital gain?

Answer

No.

Relevant facts and circumstances

You had a policy with a company. The policy provided that either a lump sum component or an income replacement component would be payable on the happening of certain events.

The company initially paid the income replacement component. The company then cancelled the policy. Payments ceased being made under the policy at this time.

You commenced proceedings in a court. You made a number of claims against the company.

A settlement was reached by which you agreed that in return for a lump sum payment you would take appropriate steps to dismiss the court proceedings. The lump sum payment was not dissected and the agreement does not make reference to the income replacement or lump sum components. No admission of liability was admitted or determined in relation to either party.

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 104-25

Income Tax Assessment Act 1997 Section 118-37

Reasons for decision

Assessable income

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) advises that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income).

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:

- are earned

- are expected

- are relied upon, and

- have an element of periodicity, recurrence or regularity.

The settlement payment you received is not income from rendering personal services, income from property or income from carrying on a business.

Taxation Determination TD 93/58 advises that where a taxpayer receives an undissected lump sum which includes assessable and non-assessable components that cannot be identified or quantified, the whole of the lump sum is treated as a capital amount.

You received an undissected lump sum payment for taking all steps necessary to dismiss the court proceedings. The agreed amount was not paid as compensation for loss of income nor was the agreed amount paid under the policy.

As the lump sum you received was not dissected, the whole amount is deemed to be of a capital nature. Therefore, the lump sum amount is not assessable as ordinary income under section 6-5 of the ITAA 1997.

Section 6-10 of the ITAA 1997 looks at amounts that are not ordinary income but are included in assessable income by another provision. These amounts are called statutory income and are also included in assessable income.

Capital gains tax

Part 3-1 of the ITAA 1997 applies to include in the assessable income of the taxpayer a net capital gain made on the disposal of assets.

CGT event C2 occurs when you enter into the contract that results in an asset ending; in this case, giving up your right to seek compensation. The amount you receive is the capital proceeds of the CGT event.

Some compensation payments are specifically excluded from assessability as a capital gain. In particular section 118-37 of the ITAA 1997 provides that a capital gain that relates to specified events is disregarded.

Firstly, paragraph 118-37(1)(a) of the ITAA 1997 provides that a capital gain from a CGT event relating directly to compensation or damage you receive for any wrong or injury you suffer in your occupation is to be disregarded. The payment you received is not exempt under this paragraph as you have not received it directly as a result of any injury in your employment.

Secondly, paragraph 118-37(1)(b) of the ITAA 1997 provides that a capital gain from a CGT event relating directly to compensation or damage you receive for any wrong, injury or illness that you suffer personally is to be disregarded. The payment you received is exempt under this paragraph as you have personally suffered a wrong. The wrong you have suffered includes the company ceasing to make payments under the policy and also other matters as detailed in the court action. The compensation you received for agreeing to withdraw your action which you commenced is a result of this wrong.

Therefore, the undissected lump sum you received from the company is a capital receipt and gives rise to a capital gain under CGT event C2. As the exemption in paragraph 118-37(1)(b) of the ITAA 1997 applies, any gain or loss will be disregarded. There is no capital gain in relation to the lump sum amount you have received as a consequence of your settlement with the company.