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Edited version of private ruling
Authorisation Number: 1011657774098
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Ruling
Subject: Assessability of compensation payment
Question and answers:
Will the lump sum amount or any portion thereof to be paid be included in your assessable income?
No.
Will any capital gain arising from the lump sum amounts be disregarded?
Yes.
This ruling applies for the following period
Year ended 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts
You sustained compensable disabilities said to have arisen from your employment.
You have indicated a willingness to accept a 'once and for all' payment which would extinguish any future rights you have to medical expenses payments.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 118-37
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).
Based on case law, it can be said that ordinary income generally includes receipts that:
· are earned
· are expected
· are relied upon, and
· have an element of periodicity, recurrence or regularity.
A receipt in respect of future medical expenses lacks the characteristics of ordinary income. Medical expenses are private expenditure of a taxpayer and the payment of this amount does not give rise to assessable income.
The lump sum redemption amount you will receive will be in satisfaction of giving up your right to future medical expenses.
This is a right that is capital in nature and the money to be received to compensate you for its relinquishment will similarly be of a capital nature. Section 6-5 of the ITAA 1997 will not apply to the lump sum redemption amounts.
Section 118-37 of the ITAA 1997
Section 118-37 of the ITAA 1997 states that you may disregard any capital gain or capital loss from any capital gains tax event 'relating directly .... to compensation or damages you receive for any wrong or injury you suffer in your occupation.'
The lump sum redemption amount to be paid meets this description.
Section 118-37 of the ITAA 1997 will apply to the lump sum redemption amount so that any capital gain or capital loss you make will be disregarded.