Edited version of private ruling

Authorisation Number: 1011607239037

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Ruling

Subject: Compensation receipt

Is the lump sum compensation amount you received from your accident claim assessable income?

No.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You were involved in a accident in an earlier year.

You signed a settlement agreement.

You provided a breakdown of the heads of claim for which you received compensation.

No compensation was paid to replace assessable income

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1997

Section 8-1 of the Income Tax Assessment Act 1997

Section 51-55 of the Income Tax Assessment Act 1997

Section 118-37 of the Income Tax Assessment Act 1997

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Ordinary income

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

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 payment was not earned by you as it does not relate to services performed. The payment is also a one off payment and thus it does not have an element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation arises from the pain, suffering and medical treatment required resulting from the injury, rather than from a relationship to personal services performed.

Taxation Ruling IT 2193 deals with the issue of compensation for loss of earning capacity (also known as loss of chance) arising from a motor vehicle accident. IT 2193 makes it clear that compensation for loss of earning capacity will not lose its character as a capital receipt simply because the amount of compensation is calculated by reference to the amount of income the taxpayer would have earned.

Medical expenses are private expenditure. Therefore, payment for future medical expenses does not give rise to assessable income.

Accordingly, the portion of the lump sum payment relating to x is not ordinary income and is, therefore, not assessable under section 6-5 of the ITAA 1997. 

Payment for interest

Generally, interest income is ordinary income and is assessable under section 6-5 of the ITAA 1997. However, section 51-55 of the ITAA 1997 regarding interest on judgement debt relating to personal injury, provides that both pre-judgement and post-judgement interest are exempt amounts and therefore excluded from assessable income.

The interest component of your compensation payment will not be included in your assessable income as it is exempt income under section 51-55 of the ITAA 1997.

Capital gains tax

Subsection 108-5(1) of the ITAA 1997 defines a capital gains tax (CGT) asset as any kind of property or a legal or equitable right that is not property.

You make a capital gain or capital loss if and only if a CGT event happens. CGT events are the different types of transactions or happenings which may result in a capital gain or a capital loss.

The disposal of an asset gives rise to a CGT event. In your case the disposal of your right to seek compensation gives rise to a CGT event.

However, section 118-37(1)(b) of the ITAA 1997 states that a capital gain may be disregarded where the amount received relates to compensation or damages for a wrong, injury or illness you suffer personally.

You received an amount to compensate you for injuries you received in a motor vehicle accident. As the claim relates to a personal injury incurred by you any capital gain or loss you make from surrendering your rights will be disregarded.

Therefore, the amount received will not be statutory income.

Tax consequences for you

The amount you received by way of a lump sum compensation payment is not assessable income in your hands and does not need to be included in your income tax return.