Edited version of private ruling

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Ruling

Subject: Assessability of lump sum payment - Injury

Question and answer

Is the lump sum payment you received from your insurance policy assessable income?

No

Does the lump sum payment you received from your insurance policy give rise to any capital gains implications?

No.

This ruling applies for the following period:

Year ending 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

Whilst you were employed, you took out a Group Salary Continuance Policy with you insurance company through your employer.

You sustained an injury at work which resulted in you being off work for two months.

You resumed working for the same employer for over 4 years.

As a result of the injury you had to work restricted hours which resulted in you receiving reduced monthly income.

You were unable to continue to work because of your injuries and sickness after 4 years

You lodged a claim for loss of wages with your insurance company under your employers' insurance policy which was initially refused on grounds that you were not eligible for benefits in accordance with the terms and conditions of the policy.

You engaged the services of a solicitor to object to the insurance companys' decision.

You lodged a statement of claim seeking

· loss of wages

· alternatively, loss and damage for suffering

· interest

· cost

The insurance company made an offer to resolve the dispute by way of a lump sum payment inclusive of interest and costs, which you accepted.

You have agreed to a Deed of Release.

You will not have further entitlement under the policy.

You discharge the insurance company, your employer & Subsidiary &/or Associated Entities and their directors, employees and agents from all liability which they may have or but for this Agreement might have had relating to the claim and policy.

You also indemnify them against all actions, claims and demands which any other person might make in respect of the claim.

The settlement in favour of you has been finalised within the financial year ending 30 June 2010.

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1997

Section 6-10 of the Income Tax Assessment Act 1997

Paragraph 118-37(1)(a) of the Income Tax Assessment Act 1997

Reasons for decision

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.

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

A compensation amount generally bears the character of that which it is designed to replace. If a lump sum payment is paid for the loss of a capital asset or amount then it will be regarded as a capital receipt and not ordinary income.

Taxation Determination TD 93/58 states that any part of a lump sum compensation amount will only be assessable as ordinary income:

· if the payment is compensation for loss of income only or

· to the extent that a portion of the lump sum is identifiable and quantifiable as income. This is possible where the parties either expressly or impliedly agree that a certain portion of the payment relates to a loss of an income nature.

Taxation Ruling TR 95/35 provides that an insured person's right of indemnity under a policy of insurance falls within the definition of a right to seek compensation.

You have accepted a payment in return for giving up your rights to make any future claims against your insurance policy, release and forever discharge the insurance company, the employer, employees and agents from all liability as well as indemnify them against all actions, claims and demands which any other person might make in respect of the claim.

Consequently, the lump sum payment you have been offered would be a capital receipt and not ordinary income.

As the payment is not ordinary income it will not be assessable income to you under section 6-5 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, paragraph 118-37(1)(a) 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 in your occupation.

Therefore the amount received will not be statutory income.

Conclusion

The compensation payment is neither ordinary income nor is it statutory income.

The lump sum amount is therefore not assessable income.