Edited version of private ruling

Authorisation Number: 1011619317713

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Compensation - Lump sum payment

1. Will the lump sum payment on settlement of workers' compensation work injury damages claim constitute assessable income in the year received?

No.

2. Will the lump sum payment on settlement of workers' compensation work injury damages claim constitute a liability under the capital gains tax (CGT) provisions?

No.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You are a non resident of Australia for taxation purposes.

You sustained a work related injury during the 2006-07 income year. 

You continued to receive weekly payments from your employer during the period you were unable to work as a result of the injury.

You engaged a solicitor to seek compensation from your employer for personal injury and economic loss as a result of your injuries sustained at work. 

As a result of your injuries, your employer has undischarged liabilities to you to pay for injury pursuant to the New South Wales Workers Compensation Act 1926(as amended) and Workplace Injury Management Act 2002 (as amended).

You signed a Deed of Release, agreeing to accept the lump sum payment to resolve your claim. You agreed that upon payment of this sum your policy would be terminated.

Settlement under the Deed of Release finalises all of your rights to any future payments of either weekly payments, medical expenses, superannuation, care and or domestic assistance.

In the Deed of Release, you acknowledged that the lump sum payment is the once only payment payable under the policy and in respect of the claim and that no further sums shall be payable to you. 

You received the lump sum payment during the year ended 30 June 2011.

The cheque in payment of settlement funds is made payable to solicitors so that professional cost can be deducted prior to forwarding moneys to you.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Subsection 6-1(1).

Income Tax Assessment Act 1997 Subsection 6-5(1).

Income Tax Assessment Act 1997 Section 6-10.

Income Tax Assessment Act 1997 Section 10-5.

Income Tax Assessment Act 1997 Section 102-5.

Income Tax Assessment Act 1997 Section 102-1.

Income Tax Assessment Act 1997 Paragraph 118-37(1)(b).

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides 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 lump sum payment you will receive is not income from rendering personal services, income from property or income from carrying on a business.

The payment is also a one off payment and thus it does not have an element of recurrence or regularity.

A payment of the nature described in the scheme generally bears the character of that which it is designed to replace. If the 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 Ruling TR 95/35 deals with the capital gains treatment of compensation receipts. The ruling provides that an insured person's right of indemnity under a policy of insurance falls within the definition of a right to seek compensation. The whole of the settlement amount is thus treated as capital proceeds from a CGT event happening to your right to seek compensation.

The lump sum payment you will receive is for entering into a Deed of Release with your insurer for the purpose of surrendering your rights under the insurance policy. Consequently, the lump sum payment is a capital receipt and is not ordinary income. Therefore, the amount is not assessable under section 6-5 of the ITAA 1997.

The disposal of an asset gives rise to a CGT event. However, paragraph 118-37(1)(b) of the ITAA 1997 disregards a capital gain made from a CGT event where the amount relates to compensation or damages received for any wrong, injury or illness you suffer personally.

Applying paragraph 118-37(1)(b) of the ITAA 1997 to your circumstances, the lump sum would not be considered as an assessable capital gain. The insurer s purpose in making the lump sum payment is so you would surrender your rights, not only to recover any such benefits in the action, but also to claim any further benefits to which you might now or in the future have an entitlement under your income protection policy. As all of these claims relate to your personal injury or illness, any capital gain or loss arising from the surrender of your rights under this policy will be disregarded. As such, this amount is not statutory income.

Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary or statutory income it is not assessable income. Consequently no part of the amount received is included in your assessable income.