Edited version of private ruling

Authorisation Number: 1011650190916

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Ruling

Subject: Assessability of compensation payment

1. Is the lump sum payment for the settlement of your workers compensation claim assessable?

No.

2. Is the lump sum payment assessable under the capital gains tax provisions?

No.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You sustained disabilities said to have arisen from your employment.

There was a dispute as to your entitlement to workers compensation.

To date you have not received any weekly income maintenance payments.

This dispute has been settled through an agreement whereby you will receive a lump sum payment.

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 15-30.

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

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.

In your case, your compensation is not income from rendering personal services, income from property or income from carrying on a business. The payment is a one off payment and thus it does not have an element of recurrence or regularity.

A compensation amount generally bears the character of that which it is designed to replace. If the compensation 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:

(a) if the payment is compensation for loss of income only ..... , or

(b) 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.

The lump sum compensation payment you will receive is in settlement of your dispute in relation to your entitlement to weekly income maintenance payments. As your lump sum payment is not paid specifically as compensation for loss of income, we consider the lump sum payment is of a capital nature.

Therefore, as the lump sum payment is capital in nature it is not assessable as ordinary income under section 6-5 of the ITAA 1997.

Section 6-10 of the ITAA 1997 includes amounts of statutory income in assessable income, that is, amounts that are specifically listed as assessable income in Division 10 of the ITAA 1997. The two provisions applicable in your case are section 15-30 of the ITAA 1997 and Part 3-1 of the ITAA 1997.

Section 15-30 of the ITAA 1997 operates to include in your assessable income an amount received as insurance or indemnity for loss of an amount if the loss amount would have been included in assessable income and the amount received is not assessable as ordinary income under section 6-5 of the ITAA 1997.

Your compensation amount does not meet this description, as it is not paid for loss of earnings but for settlement of a dispute.

Accordingly, the compensation payment that you will receive is not assessable under section 15-30 of the ITAA 1997.

Capital gains tax (CGT)

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

Part 3-1 of the ITAA 1997 contains the general CGT provisions. The disposal of an asset gives rise to a CGT event. However, paragraph 118-37(1)(a) of the ITAA 1997 disregards payments or receipts for the purposes of the CGT provisions where the amount relates to compensation or damages you received for any wrong, injury or illness suffered in your occupation.

In your case, you will receive a lump sum payment that relates to an injury suffered in your occupation.

Accordingly, section 118-37(1)(a) of the ITAA 1997 will apply to the compensation amount so that any capital gain or capital loss will be disregarded.