Edited version of private ruling

Authorisation Number: 1011633314914

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Ruling

Subject: Compensation and assessable income

1. Is any portion of your lump sum compensation payment you received in full satisfaction of your claims or any future claims arising from a motor vehicle accident included in your income?

No.

2. Will the compensation be considered an assessable capital gain?

No.

3. Will you be allowed to claim a deduction for legal fees paid to obtain the compensation payment?

No.

This ruling applies for the following period:

The year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You suffered injuries in a motor accident.

You lodged a notice of accident claim form with an insurance company. The insurance company offered you once off settlement monies.

You accepted the settlement monies and signed a release agreeing that the monies are accepted in full satisfaction of all actions, proceedings, claims, and demands for damages, costs, interest or expenses now or in the future.

The release form outlined that the settlement monies did not include any amount for economic loss, both past and future.

Your lawyer provided you with a breakdown of the professional fees and outlays to be taken out of the settlement monies.

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 Section 8-1.

Reasons for decision

Assessable income

The assessable income of a taxpayer includes income according to ordinary concepts.

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 that you will receive was not earned as it does not relate to income earning activities. It will also be a one-off payment and thus, it will not have an element of recurrence or regularity. Although the payment may be said to have been expected, and perhaps relied upon, this expectation arose from the personal injury you sustained from the motor vehicle accident, rather than from a relationship to income earning activities.

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 compensation for loss of income.

No part of your lump sum can be separately identified as being compensation for loss of income.

Accordingly, the lump sum payment is not ordinary income and is therefore not assessable.

Capital Gain

Section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income and are also included in assessable income.

Taxation Ruling TR 95/35 indicates that settlement of a personal injuries claim represents the disposal of an asset, as the taxpayer has disposed of the right to seek compensation for the losses arising from the injury suffered.

The disposal of an asset gives rise to a capital gains tax (CGT) event. However, paragraph 118-37(1)(b) of the ITAA 1997 disregards the payments or receipts where the amount relates to compensation or damages received for any wrong, injury or illness a taxpayer suffered.

The compensation amount you received was for a personal wrong, injury or illness. Therefore, any capital gain or capital loss you will make will be disregarded for the purposes of CGT.

Accordingly, the lump sum payment you will receive as a result of personal injury you sustained from a motor vehicle accident is not assessable under either section 6-5 of the ITAA 1997 or section 6-10 of the ITAA 1997.

Deductibility of the lawyer fees

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoing is of a capital, private or domestic nature.

You incurred lawyer's fees in order to obtain a compensation payment. The compensation payment you received is not assessable income as a result the lawyer's fees were not incurred in gaining or producing assessable income. Consequently, you are not entitled to a deduction for them.

Furthermore, as the payment is ignored under the capital gains provisions the lawyer's fees also are unable to make up any part of a cost base for working out an assessable capital gain.